Recession

The whys and wherefores of short-time work: evidence from 20 countries

Published by Anonymous (not verified) on Thu, 07/03/2019 - 8:00pm in

Reamonn Lydon, Thomas Mathae and Stephen Millard

Short-time work (STW) schemes are an important fiscal stabiliser in many countries.  In the Great Recession, 25 out of 33 OECD countries used short-time work schemes (Balleer et al. 2016).  STW schemes aim to preserve employment in firms temporarily experiencing weak demand. This is achieved by providing subsidies to firms to reduce number of hours worked by each employee, instead of reducing the number of workers. As well as being paid for actual hours worked, the subsidy is used to pay workers for hours not worked – albeit not completely compensating the loss of income due to reduced hours. In most countries, the bulk of the subsidy is paid by the state, although companies can also contribute.

STW is appealing from a risk-sharing perspective as it spreads negative shocks across more workers. It can also be more efficient than the alternative, especially if hiring and firing costs are high. In some countries, such as the UK, there is no official scheme. In other countries, official schemes are a core part of the institutional labour market infrastructure. Furthermore, as Cahuc and Nevoux (2017) point out, initially temporary expansions of some schemes during the recession have become a permanent part of the landscape in countries such as France.

In a recent Staff Working Paper, we use data from the third wave of the ECB Wage Dynamics Network Survey (WDN3, 2014/15) to see what determines take-up of STW schemes and what are the wider economic effects. The survey asks firms how they adjusted their labour inputs – both in quantity (employees and hours) and in wages – in response to various shocks between 2010 and 2013. The sample of just under 25,000 firms across 20 EU countries, including the UK, represents a population of 5.5 million firms and 95 million workers.

Between 2010 and 13, short-time work was used by 7% of European firms, employing 9% of workers (Figure 1). Workers in these firms, while facing a subsidised reduction in their hours, were far less likely to lose their jobs during the Great Recession, as Figure 2 illustrates for manufacturing firms.

Who uses STW and why?

If STW plays such an important role in how firms react to shocks and how workers are affected, we want to understand what determines take-up. First off, it is important to control for the shocks firms experienced. Two types of shocks appear to matter:  negative demand shocks and shocks affecting firms’ ability to access finance for their business activities make them much more likely to use STW. Our interpretation is that reduced access to finance makes it more difficult for a firm to weather cyclical downturns, prompting them to reduce labour costs through short-time work, or other means.

Figure 1 STW take-up in Europe 2010-13

Source: WDN3.
Notes: Private sector firms in Manufacturing, Construction, Trade, Business and Other Services and Financial Intermediation.

Figure 2  Demand shocks, employment adjustment and STW take-up

Source: WDN3.
Notes: Private sector firms in Manufacturing.

STW schemes are a flexible way for firms to retain workers when demand is temporarily weak. As more productive workers are more valuable to firms, regardless of the level of demand, there is a greater incentive to use short-time working schemes for these workers. Worker-productivity is not recorded directly in WDN3 survey, but the share of high- and low-skill workers and short- and long-tenure workers is. Assuming these measures are positively correlated with productivity, we expect take-up to be greater in firms with higher shares of these types of workers, which is what we find (Figure 3). In fact, for firms with a very high proportion of long-tenure workers (90%+) STW take-up is more than double that of firms with low average job-tenure levels.

Figure 3 STW take-up in high-skill (Panel A) and long-tenure (Panel B) firms

Source: WDN3.
Notes: All sectors. Data are predicted values from a regression controlling for firm and worker characteristics, altering the values for skill composition and tenure. ‘High-skilled’ in the chart refers to high-skilled non-manual workers.

Institutional factors are also important for STW take-up. Scheme characteristics, such as how easy it is for workers and firms to avail of them, affects take-up. Equally important is how STW interacts with other labour market institutions. For instance, STW take-up is higher in countries with more stringent employment protection legislation.

Another institutional factor, if we can call it that, is downward nominal wage rigidity, that is, the inability of firms to reduce wages, due, for example, to the effects on morale and/or effort of doing so. Theory suggests that firms that have to reduce labour costs are more likely to use STW if wages are more rigid. To explore this, we construct a continuous measure of downward wage rigidity at the country-sector level along the lines of Dickens et al. (2007), where zero reflects fully downward flexible wages, and 100 completely rigid. We find that downward wage rigidity does matter for STW take-up. In sectors with low- to medium-levels of downward wage rigidity, take-up is relatively low (5%). In contrast, STW take-up jumps to 10%, and then 14%, in firms with ‘high’ and ‘very high’ levels of wage rigidity, respectively.

Figure 4  Downward wage rigidity and STW

Source: WDN3.
Notes: Conditional on firms saying they had to reduce labour inputs between 2010 and 2013. Data are predicted values from a regression controlling for firm and worker characteristics, altering the values for wage rigidity.

Does STW take-up matter in aggregate?

For the individual worker or firm, STW clearly shelters them from the worst effects of recessions.  However, does it have a significant aggregate impact?  This question is the focus of several papers on the job-saving effects of STW in individual countries (eg, Balleer et al. 2016 for Germany).  To answer this question with the WDN3 data, we divide countries and sectors into those with high levels of STW take-up, where more than 10% of firms use STW in the country-sector, and those with low-levels, where fewer than 1% of firms use STW.  Using Eurostat data on employment and output per sector from 2008-13, we then estimate the response of employment to falls in output for high- and low-STW sectors.

Figure 5 shows the results in the form of the responses of employment to a 1% fall in output. The fall in employment is considerably lower for high-STW sectors, where it peaks at 0.12% after three to four quarters. In low-STW sectors, by contrast, the employment fall peaks at the much higher level of almost 0.40%, after just two quarters. This suggests that STW can have significant aggregate effects, smoothing changes in overall employment through the cycle.

Figure 5  Effect of STW on the response of employment to a fall in output

Source: WDN3.
Notes: Responses estimated from a panel VAR, assuming that employment follows output with a lag. There are 2,222 country-sectors in the two samples, of which, approximately 900 are in the high-STW group.

Conclusion

Our work documents the influences on the take up of short-time work schemes in many EU countries. Economic theory as to why firms might use these schemes is completely backed-up by the data: negative shocks, higher firm-specific human capital, labour market institutions that increase firing costs, and greater levels of wage rigidity all push firms towards availing of these schemes. We also provide some evidence that the presence of STW schemes can reduce the fall in employment brought on by a recession.

A similar version of this post was published by VoxEU.

Reamonn Lydon works for the Central Bank of Ireland,
Thomas Mathae for Banque centrale du Luxembourg and
Stephen Millard works in the Bank’s Structural Economics Division.

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Comments will only appear once approved by a moderator, and are only published where a full name is supplied. Bank Underground is a blog for Bank of England staff to share views that challenge – or support – prevailing policy orthodoxies. The views expressed here are those of the authors, and are not necessarily those of the Bank of England, or its policy committees.

Gloom Ahead of World Economic Storm

Published by Anonymous (not verified) on Fri, 18/01/2019 - 2:01am in

By Jomo Kwame Sundaram and Anis Chowdhury

Cross-posted at Inter Press Service.

In light of the uncertainty caused by the US-China trade war, the IMF expects the US economic growth to slow from a three-year high of 2.9 per cent in 2018 to 2.5 per cent in 2019, while China’s expansion has already slowed in recent years, albeit from much higher levels.

Trump stimulus dissipates
US President Trump and the previous GOP-controlled US Congress claimed to be breathing new life into the US economy with generous tax cuts. The US economy is now overheating, with inflation rising above target, causing the Federal Reserve to continue raising the federal funds rate to dampen demand.

As most families hardly gained from the tax changes, US purchases of houses and consumer durables continued to decline through 2018. Instead of investing in expanding productive capacity, US companies spent much of their tax savings on a $1.1 trillion stock buy-back spree in 2018.

Hence, the positive impacts of tax cuts were not only modest, but are also diminishing. Nearly half of 226 US chief financial officers recently surveyed believe that the US will go into recession by the end of 2019, with 82 per cent believing that it will have begun by the end of 2020. Wall Street’s biggest banks, JP Morgan and Bank of America, are also preparing for a slowdown in 2019.

As if to confirm their concerns, both the Dow Jones Industrial Average and the S&P 500 had their worst ever December performance since 1931, when stocks were battered after the Great Crash.

European recession

Meanwhile, the European Central Bank is expecting sluggish 1.7 per cent regional growth in 2019. Europe is close to recession with the collapse of industrial output in Germany, France, UK and Italy.

Germany’s industrial output fell by 1.9 per cent month-on-month in November 2018, and was in negative territory in 5 of the 6 months before December. Its GDP fell by 0.2 per cent in the 3rd quarter of 2018. France’s industrial production fell 1.3 per cent in November 2018, reversing a 1.3 per cent growth recovery in October from a 1.7 per cent decline in September. Italy, Europe’s third largest economy, recorded negative growth in the 3rd quarter of 2018 as GDP fell by 0.1 per cent in July-September 2018 with weaker domestic demand.

As the UK remains mired in its Brexit mess, GDP growth was dragged down to 0.3 per cent in the three months to November with the biggest industrial output contraction since 2012. 2018 final quarter growth is expected to be 0.1 per cent, i.e., negligible.

Not preparing for the inevitable?
David Lipton, the first deputy managing director of the IMF, warned in early January 2019, “The next recession is somewhere over the horizon, and we are less prepared to deal with that than we should be . . . [and] less prepared than in the last [crisis in 2008].”

Although the IMF had projected 3.7 per cent global economic growth for 2019 in October 2018, Lipton’s statement suggests that the IMF is likely to revise its 2019 growth forecast downward.

There have also been growing concerns over the continued efficacy of unconventional monetary policy since the 2008-2009 global financial crisis (GFC). Undoubtedly, countries now have less fiscal space than in 2009, and overall borrowing, including public debt has risen since.

Reaping what you sow

The policy blunders since the GFC have only made things much worse. The ideologically driven case for fiscal consolidation did not boost investor confidence for a robust recovery, as promised.

Despite acknowledging false claims cited to justify fiscal consolidation, including the IMF’s admission that its early advice was based on faulty calculations, there was no recommended change in policy course.

Instead, all responsibility for recovery was put on the monetary authorities who resorted to unconventional policies, especially ‘quantitative easing’ (QE). However, the global economic recovery since then has remained tepid and easily reversible.

Additional liquidity, made available by QE, has largely been used to buy financial assets and for speculation, amplifying the financial vulnerability of emerging market economies, which have experienced increased volatility.

Governments also failed to take advantage of historically low, even negative real interest rates to borrow and invest to boost productive capacity in the longer term.

By mainly benefiting financial asset holders, QE has exacerbated wealth concentration. Meanwhile, cuts in public services and social spending have worsened social polarization, as tax cuts for the rich have failed to generate promised additional investments and jobs growth.

The failure to achieve a robust recovery has not only worsened the debt situation, but also made lives harder for ordinary people. Growing polarization has also worsened resentments, eroding trust, undermining solidarity and progressive alternatives.

Ethno-populist jingoism undermines cooperation

But lack of preparedness can hardly be due to ignorance as there have been many such predictions recently, certainly more than in 2007-2008, before the GFC.

The cooperation that enabled co-ordinated actions to prevent the Great Recession from becoming a depression has not only waned, but major countries are now at loggerheads, preventing collective action.

National political environments are also more hostile. In Europe, the rise of ethno-populist nationalism is making it harder to pursue EU-level policies and to act together to prevent and mitigate the next financial crisis and downturn.

The “new sovereigntists” and false prophets of American exceptionalism are undermining multilateral cooperation when needed most. Thus, a recession in 2019 may well elevate geo-political tensions, exacerbating the negative feedback loop for a ‘perfect storm’.

Anis Chowdhury, Adjunct Professor at Western Sydney University and the University of New South Wales (Australia), held senior United Nations positions in New York and Bangkok.

Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.

SYNDICATED COLUMN: George H.W. Bush Hagiography is the Elites’ Finest Accomplishment

Published by Anonymous (not verified) on Tue, 04/12/2018 - 9:58am in

Image result for highway of death

Even by the recent can’t-believe-your-eyes-and-ears standards of American elitist hagiography this week’s over-the-top-of-the-top praise of George H.W. Bush was astonishing.

What separated Bush41apalooza from such previous pseudo-griefathons as those for Ronald Reagan and John McCain was that there was so little to work with. Not that it stopped the media.

I knew this was an insane historical benchmark when a major network interrupted its coverage of the G-20 summit with the BREAKING NEWS that George W. Bush had issued a statement about his dead dad: “George H.W. Bush was a man of the highest character and the best dad a son or daughter could ask for.” Stop the presses!

When a right-wing Republican like Bush dies you can count on a Democrat to deliver his most fulsome praise. “America has lost a patriot and humble servant,” said Barack and Michelle Obama. “While our hearts are heavy today, they are also filled with gratitude…George H.W. Bush’s life is a testament to the notion that public service is a noble, joyous calling. And he did tremendous good along the journey.”

Trump lies constantly but it took the death of Bush 41 for American “leaders” and their media mouthpieces to fully commit to speaking an English language whose words have no meaning whatsoever. In this dystopia I’d call Orwellian save for the fact that old George’s prophecy didn’t anticipate its hilarious absurdity, a man who ran for president three times qualifies as “humble.” A commander-in-chief who ordered the massacre of tens of thousands of innocent people in one of the most gruesome war crimes ever recorded—the “Highway of Death” following the ceasefire that ended the Gulf War—is described as having great character—yet no one upchucks all over the camera lens as if it were a Japanese prime minister.

A steward of the economy who refused to stimulate a tide or raise any boats in the middle of a brutal six-year-long recession can be called many things but not—before the Obamas—“joyous.” Preppy, I’ll give you. Joyous, no.

John Sununu, Bush’s chief of staff, explained in 1991, that doing “tremendous good” was actually contrary to Bush’s governing philosophy: “The President feels very strongly that the free-market system operates best when it does not have its hands tied by government, is not shackled by a system that erroneously thinks it can improve it by command and control.” Bush chimed in: “I do not want to see the government pick winners and losers.” Except his government did create losers: his refusal to fund AIDS research killed tens of thousands of gay men.

I’m in favor of behavioral change,” Bush said to justify his policy, a brazen sop to the Christian Right. “Here’s a disease where you can control its spread by your own personal behavior.” Memo to gays: don’t have sex. So “joyous.” So much “tremendous good.” Guess we’ll never get that apology now.

Fawning over dead presidents and the occasional dead presidential candidate is always repugnant considering they’re such a callous and bloodthirsty lot of greed-dogs. But Bush 41—his death dance is different.

Like him or not, Reagan was a consequential person with undeniable political acumen. Even under Democrats Clinton and Obama we have continued to accept the Gipper’s redefinition of the social contract from a culture of looking out for one another to every man for himself. His easy aw-shucks vocal delivery made the most liberal voters sleep through eight years of budgetary, tax and military mayhem—no easy feat.

Likewise John McCain was a deeply—mostly—flawed man who nonetheless had enough of an engaging story, his experience as a POW in Vietnam, for the hagiographers to blow up into a fairly credible heroism narrative, overcoming the uncomfortable fact that the war he volunteered to kill in is understood to have been immoral and illegal.

Bush, on the other hand, has always been a former president universally understood to be a do-nothing failure. Screwed up the economy, set the stage for his son’s Iraq War, refused to turn post-Cold War Russia into a friend and ally, preferring to watch the former USSR plunge into chaos and mass starvation so his big banker backers could swarm in and loot state-owned enterprises. You could call him the Republican Jimmy Carter but Bush—unlike Carter—was never rehabilitated by history or the electorate. Whereas Carter (actually humbly) dedicated himself to Habitat for Humanity during his long post-presidency and so earned respect, Bush 41 just—what? Showed up for presidential reunion photo-ops? He just nothinged. Even Republicans didn’t much care for him.

Were you surprised that Bush died because you didn’t know he was still alive?

There was once a time when, when presidents died, you imagined that at least some of the network news talking heads believed some of what they read to you, that some of the mawkish tributes were heartfelt. No more.

The fakery is so phony they don’t even bother to hide it anymore.

Like Winston Smith at the conclusion of “1984,” the bullet in the back of the rotting head of BS American democracy comes almost as a release.

(Ted Rall (Twitter: @tedrall), the political cartoonist, columnist and graphic novelist, is the author of “Francis: The People’s Pope.” You can support Ted’s hard-hitting political cartoons and columns and see his work first by sponsoring his work on Patreon.)

 

 

The Myth of the Robust Deregulated Economy

Published by Anonymous (not verified) on Mon, 26/11/2018 - 8:43pm in

[Published at Pearls and Irritations 3 Dec 18]

The economic ‘reforms’ of the 1980s are supposed to have set Australia up for an unprecedented run of prosperity: 27 years, and counting, without a recession. The economy’s robustness is supposed to have saved us from the Global Financial Crisis. In fact our economy has been unstable, and its performance has been mediocre verging on anaemic. Any appearance of robust prosperity is due to a huge run-up of debt, some direct intervention, high immigration, overwork, selective blindness and over-active imaginations.

“Just think how the old Australia – the over-regulated, overprotected and inflation-prone Australia – would have coped with the global financial crisis a decade ago” gushed Tom Switzer of the Centre for Independent Studies in a recent column. Australia made the cover of a recent Economist, and George Megalogenis did a book and a TV series on it (I have critiqued Megalogenis’ claims before). The mantra has been relentless since 1983.

What a shame such a seductive story turns out to be a flimsy confection.

That dreadful “old” Australia, presided over, we should remember, by that pinko Bob Menzies, achieved average annual GDP growth exceeding 5% and unemployment averaging a minuscule 1.3%. Nowadays such numbers are considered impossible, guaranteed to bring on raging inflation, but inflation averaged a moderate 3.3%. The contrast was documented over 20 years ago by Stephen Bell (Ungoverning the Economy, 1997). The post-1983 neoliberal economy has never come close to this performance, with GDP growth around 3%, unemployment rarely below 5% and inflation in the 2-3% range.

Ah, but what about the 1970s, you may be thinking? There was Whitlam, stagflation, global chaos and the disastrous demise of the Keynesian era. Yes, what about them? First of all, the price of oil quadrupled, so of course economies struggled. That’s the stagnation part of stagflation. The US went off the gold standard and tried to pay for its Vietnam war by printing money. That’s a large part of the inflation component of stagflation. If there was a wage-price spiral also contributing to inflation, that was the doing of unions and bosses – it takes two to tango. But you have to count the US contribution to inflation before you lay any remaining blame elsewhere.

It was quite disingenuous of neoliberal campaigners to blame the difficulties of the 1970s on Keynesian management and, locally, Whitlam. As to Whitlam’s much-derided economic management, Australia was the only OECD country to avoid recession in the 1970s too, and the UK and US recessions were severe. So the Whitlam years were not quite the unmitigated disaster they are commonly portrayed as.

What about the alleged stability of the modern economy, its ability to ride-out financial crises? Neoliberal deregulation caused both Australia’s and the world’s worst recessions since the Great Depression.

Banks make most of their money by ‘loaning’ money. (They create the money they ‘loan’ with a few keystrokes, but that’s another story.) When the Hawke-Keating government deregulated Australia’s banks the banks competed to throw money at ‘entrepreneurs’ – people like Alan Bond and Christopher Skase. There was a huge run-up of private business debt. The economy boomed along with much cheering from the breathless commentariat. But then the debt bubble burst, precipitating the Keating recession of the early 1990s, the worst since the 1930s and a recession we did not have to have.

The deregulated global financial system was also having the odd hiccup. There was the 1987 stock market crash, assorted national crises in Mexico, Russia, Brazil and Argentina, the Asian currency meltdown in 1998 and the dot-com bust in 2001. Meanwhile toxic debt was being spread through the global system by unscrupulous, competing financiers. The bursting of that debt bubble brought on the Global Financial Crisis and the ensuing Great Recession (actually a depression in peripheral Europe and parts of the US).

Australia avoided a GFC recession because the Rudd-Swan Government, uniquely in the world, briefly suspended neoliberalism and spent directly into the economy. Yes the mining boom helped, but the short-term timing is clear. Christmas 2008 was gloomy everywhere but here.

Australian business and manufacturing have been hollowed out by a shift towards short-termism and financial speculation. The consequences of this were disguised for a long time by a steady rise in private debt, much of it household mortgage debt, as documented for example by Egan and Soos (Bubble Economics, 2014). We were living on our credit card. Since the capacity to increase debt saturated after the GFC our economy has been increasingly anaemic, and a collapse of the debt bubble remains a clear danger.

The weakness has also been disguised by two other factors. First, an increase in working hours. Second, the high immigration rate, which keeps the GDP expanding (just) though the GDP per capita and median incomes stagnate.

It is not a little gob-smacking that neoliberal apologists can (still) look at this history and extract a story of an economy saved by deregulation. Remember, these are the people who didn’t see the GFC coming, for the basic reason that they exclude debt from their models and minds. It is testimony to the power of faith over evidence.

Australia has suffered long-term damage from this grand, misguided experiment in social engineering. Pauline Hanson got her start in the bitter aftermath of the Keating recession (11% unemployment), just as Trump and various fascist movements have risen from the ashes of the GFC.

We are a divided, unhappy nation and society. People know they have been ripped off by the financial class. Young people can’t afford houses and higher education is increasingly out of reach. People are being priced out of their homes. All the ailments of poverty and disaffection are increasing, including scapegoating. The Abbotts and Duttons have found fertile ground for their fear-mongering.

We are relatively fortunate that mainstream Australians’ patience seems at last to be wearing thin and they are rebelling at the ballot box. Resistance is taking more toxic forms in many other nations.

It is insulting to Australians to call this resistance ‘populism’. The neoliberal experiment has been a disastrous failure and people have been slowly waking up to the nonsense they have been fed, for decades.