Great Recession and Labor Market Anomalies: the German Labor Market Miracle Revisited from a Decision Under Risk Perspective
Abstract: The phenomenon of the so-called German labor market miracle is the point of departure for our analysis. Yet a consistent theoretical explanation of jobs safeguarding during the Great Recession is lacking, important ad-hoc hypotheses exist. For example, Burda/Hunt (2011) are intuitively convinced that using labor adjustment along the intensive margin through working time accounts is a key element in the puzzle. The major objective of this paper is to close this research gap. Therefore, we introduce a formal model of adjustment practice working time accounts as a mutual insurance device. As an extension and generalization of the quite well-known labor market practice of work sharing, working time accounts allow for adjustable sharing coefficients, while holding remuneration constant, regardless the sign of hour deviation compared to standard hours. Such generalized work sharing is achieved via intertemporal shifting of hours worked by an employee, with every single transfer being recorded in a time banking system. This paper contributes to theoretically resolving the remaining jobs safeguarding puzzle and derives a model of labor adjustment based on well-defined probability mass shifts and application of stochastic dominance rules. The associated solution is characterized by features of a silver bullet for employment. In sum, our model not only explains the remaining puzzle of missing employment decline in the Great Recession, but also helps to fill the research gap on missing employment increases due to reluctant hiring behavior in the preceding expansion. In fact, working time accounts are capable to eliminate antipodal labor market risks. Moreover, when facing unprecedented downturn they even impose a mean increasing decrease in risk. Therefore, we conclude that there are lessons to be learnt from German labor market practices and industrial relations.
