A number of commentators in the discussion yesterday doubted whether West Germany had non-natural rate unemployment just before unification. I didn't cover this in detail because I thought it was commonly accepted, but I'll offer up more evidence and it suggests oth unemployment and a deficiency of aggregate demand at the time. Here, from the Kansas City Fed, is one typical account of West Germany, from 1989:
Thus, unemployment increased steadily from 1970 to 1988. What caused this asymmetric effect of monetary policy on unemployment? As argued below, restrictive monetary policy in combination with adverse external shocks…
The article describes West Germany as, through the 1980s, having had "persistently high unemployment." (Keep in mind that less than twenty years before the unemployment rate in West Germany was one percent, though the natural rate was rising over time.)
There were also plenty of structural reasons for West German unemployment, but those nominal and real rigidities are potentially amenable to macroeconomic policy. Here's another treatment, from 1990, noting the persistent unemployment in West Germany, in excess of the natural rate. This lengthy study, while finding AD deficiencies to be one factor behind West German unemployment, focuses on structural causes of unemployment, most of all wage rigidities. That's a moot point; those unemployed workers still should benefit from well-executed fiscal and monetary policy, at least to the extent one believes such policies to be effective. The study also finds that frictional unemployment and structural unemployment in the Lilien sectoral shift sense — the kinds that don't respond well to fiscal policy under any account — to be slight in West Germany at that time.
What many miss about European unemployment is that each country has somewhat different labor market institutions, all of which worked in the times of unexpected growth of the ’50s and 60′s, and failed miserably in coping with later supply shocks.
German unemployment used to depend on luck–there is no natural rate–but since unification, firms have dropped out of voluntary membership in wage agreement clubs [East German firms first]and federal and state’s policy have apparently not been too idiotic, and here or there, intelligent, if the financial crisis indeed turns out to be temporary.
In old German institutions, the efficacy of monetary policy depended upon surprises to the wage negotiators. By present ties, there seems to be much more market on the labor market.
Friends, on European labor markets, details matter.
Michael, well, yes, except that the word “structural” is not helpful here.
I’m arguing to not use evidence from Post WW II Europe, or even some of Pre WW II Europe [and America], in support of any extant macro theory, unless institutional details of the labor market are considered and built into it.
In a perhaps somewhat more minor way, that would also apply to US unemployment at the moment.
Certainly, there may be a “zero lower bound” problem independent of the labor market, which, if it exists, would not be helped by a well functioning labor market.
I came to Germany in the late 1980s and remember being struck but some odd contrasts to the US in employment. The first was that the service sector was very small. Fast food was much rarer. Restaurants and hotels were (and are) minimally staffed. Getting anything delivered was nearly impossible. There were few, if any, chains providing specialized auto repairs, with repairs performed only in dealerships or very small shops. A disabled person would have to fend for themselves on trains. If you landed at Frankfurt Airport past 10 pm, there was no opportunity to exchange money, book a hotel or rent a car. There with rare exceptions like bookshops where it was basically impossible to browse on your own, as access to books was tightly controlled by the over-trained and over-paid staff, so that every single purchase was accompanied by a staff person. On the other hand, I remember some surprising inefficiencies in other fields. For example, mid-level bank employees, like credit analysts, dictated all of their (lengthy) reports, which were then typed up by the steno pool. The idea that an analyst would operate his or her own typewriter or computer was completely foreign in most banks until the mid- to late 90s.
Frank:
I was directing my comment at Tyler Cowen. It seems to me that West Germany’s persistently high unemployment through the 1980s was “structural unemployment” (a term used in macroeconomic textbooks when I studied the subject) and not “cyclical unemployment.” Krugman’s point is that in the USA, currently, we face a cyclical unemployment problem and for this reason Cowen’s comment in the above post doesn’t tell us much about the current problems and solutions.
Sorry for the confusion.
Michael, did you even read the post? It’s like if the post said “the sky is blue” and you said “sounds like the sky is green!” with no elaboration.
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