Which factors were behind Germany's labour market upswing? A data‐driven approach*
| Published date | 01 October 2022 |
| Author | Christian Hutter,Francesco Carbonero,Sabine Klinger,Carsten Trenkler,Enzo Weber |
| Date | 01 October 2022 |
| DOI | http://doi.org/10.1111/obes.12508 |
OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 84, 5 (2022) 0305-9049
doi: 10.1111/obes.12508
Which factors were behind Germany’s labour market
upswing? A data-driven approach*
CHRISTIAN HUTTER,† FRANCESCO CARBONERO,‡,§ SABINE KLINGER,†,¶
CARSTEN TRENKLER# and ENZO WEBER†,¶
†Institute for Employment Research (IAB), Research Department Forecasts and Macroeconomic
Analyses, Regensburger Str. 100, Nuremberg, Bavaria, 90478, Germany (e-mail:
christian.hutter@iab.de)
‡Fondazione CRC, Via Roma 17, Cuneo, 12100, Italy
§University of Turin, Via Giuseppe Verdi 8, Torino, 93053, Germany
¶University of Regensburg, Universit¨
atsstraße 31, Regensburg, Bavaria, 93053, Germany
#University of Mannheim, Mannheim, Baden-W¨
urttemberg, 68131, Germany
Abstract
Germany has experienced a strong and sustained labour market upswing since the
mid-2000s. While various studies have highlighted different specific reasons for this
development, this study contributes to the debate by simultaneously considering a broad
set of candidate factors for the upswing in a unified methodological framework and
systematically weighing them against each other on an empirical basis. We develop a
structural macroeconometric framework that leaves as many of the systematic interlinkages
as possible for empirical determination while operating with a minimal set of restrictions
in order to identify economically meaningful shocks. For this purpose, we combine short-
and long-run restrictions based on established assumptions on labour force development,
technological change, and search and matching in the labour market. Matching efficiency,
the intensity of job creation, the growing labour force, and the declining propensity to
separate explain most of the German labour market upswing.
I. Introduction
While labour markets in Europe and worldwide have struggled from the repercussions
of the Great Recession and the European debt crisis for nearly a decade, Germany has
embarked on a strong and sustained labour market upswing. By 2018, unemployment
was more than halved compared with the peak in 2005, and employment has followed a
steep and stable upward trend even in times of a weak economy. Consequently, debates in
JEL Classification numbers: C32, E24, J21.
*We are grateful to Hermann Gartner, Britta Gehrke, Christian Merkl, Thomas Rothe, Heiko St¨
uber, and to the
participants of the IAB-FAU Macro-Labor Seminars 2018 and 2019, the IAB-UR Econometric Seminar 2019,
the T2M conference 2019, the IAAE conference 2019, and the EEA conference 2019 for helpful suggestions and
valuable input.
1052
©2022 The Authors. Oxford Bulletin of Economics and Statistics published by Oxford University and John Wiley & Sons Ltd.
This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and
reproduction in any medium, provided the original work is properly cited.
Which factors were behind Germany’s labour market upswing? A data-driven approach 1053
academics and politics have revolved around the question of the decisive reasons for this
extraordinary development. These discussions are highly relevant far beyond the national
context. For example, consideration is being given to whether and to what extent the
German labour market reforms of the last decade should be replicated or whether the
German success was based on a wage dumping policy compared with its trading partners.
These reforms may have contributed to the labour market upswing by increasing
the institutional matching efficiency to improve the matching on the labour market,
strengthening the incentives for firms to create jobs, increasing the willingness of workers
to make concessions, and reducing the readiness to separate employment relationships.
On the other hand, arguments are put forward that the key driving forces are exerted
by large macro trends such as strong economic development, an increasing labour force,
wage moderation, and a rising proportion of part-time workers. In this study, we explore
the empirical relevance of this comprehensive set of potential factors and weigh them
against each other on the basis of a large and well-identified structural macroeconometric
model. In particular, we address shocks on matching efficiency, separation propensity, job
creation intensity/deregulation, willingness to make concessions/wage determination, the
labour force, and working time as well as a technology shock and an additional business
cycle shock (with purely transitory effects).
This collection represents both a synopsis and an extension of the previous literature.
For example, increased matching efficiency after severe labour market reforms has been
documented (e.g. Launov and W¨
alde, 2016; Klinger and Weber, 2016; Hertweck and
Sigrist, 2015), as well as lower separation rates (Hartung, Jung and Kuhn, 2018; Klinger
and Weber, 2016). Some have argued that worsened outside options have increased the
willingness of the unemployed to make concessions (Krebs and Scheffel, 2013) and have
connected the social benefit reform to increased selection rates and vacancy postings
(Hochmuth et al.,2021). Others have pointed to a positive effect of moderate wages and
flexible wage setting (Dustmann et al.,2014). Moreover, an increase in labour supply
could have boosted employment (Burda and Seele, 2020) just as generally lower and/or
more flexible working hours (Burda and Hunt, 2011; Balleer et al.,2016; Weber, 2015;
Carrillo-Tudela, Launov and Robin, 2021).
The purpose of the underlying study is to learn about the relevance and timing of
the different effects by systematically weighing the candidate reasons for the labour
market upswing against each other on an empirical basis. The brief review outlined above
demonstrates that the literature as a whole provides an extensive debate over the subject.
Notwithstanding, the single studies have usually focused on specific points. While in
the course of this discussion, many essential points are illuminated, an investigation
comprising a broad set of factors in a unified methodological framework makes a crucial
contribution.
The research concept comprises a flexible modelling approach. In particular, for an
open approach, it is crucial to minimize the need to set assumptions a priori. That is,
the less restrictive the econometric procedure is designed to be, the more the data will
speak in the results. In this regard, a structural vector error correction (SVEC) framework
has particular merits. By using this model class, we can leave as many of the systematic
interlinkages as possible for empirical determination while operating with a minimal set of
©2022 The Authors. Oxford Bulletin of Economics and Statistics published by Oxford University and John Wiley & Sons Ltd.
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