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When the economy is hit by a sudden drop in demand, employers typically react by cutting employment or hours of work — sometimes both.
In a recent paper, John Schmitt of the Center for Economic and Policy Research reviews the experiences of Denmark and Germany in the Great Recession and finds that, while both countries experienced a comparable decline in their economies, the outcomes for employment were very different.
German employers absorbed the decline in demand entirely with reductions in employee hours of work. As a result, unemployment actually fell over the course of the Great Recession, even as Germany’s Gross Domestic Product (GDP) declined.
The German approach is partly attributable to negotiations with unions; union coverage in Germany is 63%. But German employers also took this path because of a program called “short work,” a version of what we know in the U.S. as Shared Work.
Under these programs, an employer facing a decline in demand can cut hours of work rather than jobs. Employees who take a pay cut because they are working fewer hours have their pay supplemented with unemployment insurance benefits.
Employers get the benefit of having workers available when demand returns, which saves them training and hiring costs. Workers get unemployment benefits, while keeping their job and their skills and maintaining ties to the workforce.
In Denmark, employers reacted to the Great Recession in much the same way as they have in the U.S.: they cut mostly jobs.