Labor Market Policy
in the Great Recession
Lessons from Denmark and Germany
Center for Economic and Policy Research
The Great Recession started in the United States, but it quickly spread to the rest of the world. Although some countries fared even worse than the United States, many have weathered the crisis better. This chapter reviews the experience of 21 rich countries that are all members of the Organisation for Economic Co-operation and Development (OECD)—a group of economies that offer a standard of living roughly comparable to that of the United States—in search of possible lessons for the United States.
Figure 3.1 shows the percentage point change between 2007 and 2009 in the unemployment rate across these 21 rich countries. Since national definitions of the unemployment rate vary somewhat, the figure uses “harmonized” unemployment rates prepared by the OECD. It covers a period that starts in 2007—the year just before the downturn hit most economies—and ends in 2009—the year that the economy reached its trough in most countries.1 The United States had the thirdhighest increase in unemployment (4.7 percentage points), after Spain (9.7 percentage points) and Ireland (7.2 percentage points). In the other OECD economies, the increase in unemployment was less than 2.5 percentage points. Strikingly, the unemployment rate actually fell in Germany (−1.2 percentage points).
Economic theory suggests three possible reasons for the different unemployment experience. The first is that the size of the negative demand shock might have varied across these economies. It could be, for example, that Spain suffered a larger negative demand shock than the United States, which in turn experienced a worse demand shock than