FS I 94-301
The Macroperformanceofjth
A Comparison to the^WSXabi
Ronald Schettkat
discussion paper
an Labor Market:
Labor ^
This paper gained substantially from discussions in international workshops on
"Institutional Frameworks and Labor Market Performance"
organized by the Institut fiir Arbeitsmarkt- und Berufsforschung and the WZB.
Januar1994
ISSN Nr. 1011-9523
Research Area:
Labour Market
and Employment
Research Unit:
Economic Change and Employment
Forschungsschwerpunkt:
Arbeitsmarkt und
Beschaftigung
Abteiiung:
Wirtschaftswandel und
Beschaftigung
ZITIERWEISE/CITATION
Ronald Schettkat
The Macroperformance of the German Labor Market:
A Comparison to the US Labor Market
Discussion Paper FS 194 -301Wissenschaftszentrum Berlin fiir
Sozialforschung 1994
Forschungsschwerpunkt;
Arbeitsmarkt und Besehaftigung (FS I) Abteilung:
Wirtschaftswahdel und BesehMtigung
Research Area:
Labour Market and Employment
Research Unit:
Economic Change and Employment Reichpietschufer 50
K e i c n m e t s c r
10785 Berlin
Abstract
Institutional changes in the German economy mainly in the 1970s are blamed to have caused ri^dities especially in labor markets and it is argued that these rigidities have led to high levels of persistent unemployment. This paper discusses briefly some of the central labor market institutions in Germany and their development over time, it presents some facts of labor market trends and investigates whether the hypothesis of a sclerotic German labor market can be confirmed by the data. It will be shown that the dramatic decline in the economy's labor mobility is to a substantial part the result of a shorter hiring chain caused by excess supply of labor. Finally use will be made of Beveridge curve, matching function, and change-duration curve analysis to investigate whether the functioning of labor markets has been worsened in Germany. Throughout the paper comparisons to developments in US labor markets will be made.
Zusammenfassung
Institutionellen Ver^derungen aus den 70er Jahren wird hSufig vorgeworfen, dafl sie Rigiditaten vor allem im Arbeitsmarkt verursacht haben. Diese Rigiditaten, so wird behauptet, seien fur das hohe Niveau und die anhaltende Arbeitsldsigkeit verantwortlich.
In diesem Papier wird ein kurzer Uberblick der wichtigsten Arbeitsmarktinstitutionen in der Bundesrepublik und ihrer VerSnderungen gegeben, es werden Fakten der Arbeitsmarktentwicklung prSsentiert und es wird analysiert, ob die Hypothese eines sklerotischen deutschen Arbeitsmarktes empirisch bestatigt werden kaim. Es wird gezeigt, dafi der deutliche Riickgang der Mobilitgt im bundesrepublikanischen Arbeitsmarkt zu einem erheblichen Teil durch eine verkiirzte Mobilitatskette aufgrund des Arbeitsangebotsiiberhanges erklart werden kann. AbschlieBend werden Beveridgekurven, Matchingfunktionen und Zustrom-Dauer-Kurven herangezogen, um zu untersuchen, ob sich die Anpassungsfahigkeit des deutschen Arbeitsmarktes verschlechtert hat. Die Entwicklung des US-amerikanischen Arbeitsmarktes wird durchgehend als Vergleichsmaflstab herangezogen.
Contents
1. Introduction 1
2. The Development of Labor Market Institutions in Germany;
A Brief Overview 3
2.1 Social Security Insurance
2.2 Collective Bargaining
2.3 Codetermination
2.4 Employment Protection
2.5 Summary of Institutional Changes
3. Explaining the Declining Mobility in the German Labor Market 12
4. Analysis of the Functioning of Labor Markets 17
4.1 Beveridge Curve Analysis 4.2 The Matching Function
4.3 Change Duration Curves5. An Institutional Hysteresis Explanation for Persistent German
Unemployment 27
Literature 30
1. Introduction
The spirit in economics of the 1980s was clearly that an unregulated economy produces optimal outcomes. Regulations were regarded as an impediment to otherwise well functioning markets. Labor market institutions in Germany or in Europe in general were the first class target for the fi-ee market advocates and indeed the performance of European labor markets looked quite bad with its high levels of unemployment and low rates of job growth. ^ The far less regulated US labor market produced high rates of employment growth and decreasing rates of unemployment despite of a growing labor force. On the contrary, employment in Europe was stagnating and unemployment was rising and remained at high levels.^
The US became the major example for the assumed power of unfettered labor markets in which incentives are undistorted. The labor markets of the European welfare states were blamed to have distorted the incentive structure resulting in immobility in the labor market which was coined as Eurosclerosis (Giersch 1985). Welfare state institutions may, on the other hand, have positive effects on economic development as well. The unemployment insurance, for example, can stabilize demand, employment protection can stabilize employment, etc. Institutions are not that easy to changebut with the current restructuring in Eastern Europe the choice of institutions is a hot issue. It is therefore important to investigate whether institutional changes in Germany mainly during the 1970s may have deteriorated the functioning of the labor market. A quick glance on labor mobility figures seems to support this view: Labor turnover in the US is higherthan in Germany but the figures dropped in both countries over time.
Aside the fact that higher rates of mobility (labor turnover) do not necessarily result in higher flexibility (see Sengenberger 1987) it is also less clear whether high labor turnover leads to high employment growth and low unemployment or whether the causation goes into the other direction, that is that turnover increases when unemployment is low. The relationship between unemployment and hiring for the German economy will be analyzed with the concept of the hiring chain. Trends in the Beveridge curve are discussed, matching functions are estimated and use will be made of change duration curves. To begin with, a brief overview of changes in the main
1 For a critical analysis "on the view that the US does not have an unemployment problem": Freeman (1988)
2 The employinent trends, however, were already apparent in the 1960s when Europe was the shining e.\ample for US labor policies (Schettkat 1992)
institutions of the German labor market is presented. In the conclusions some thoughts on the expansion of long-term unemployment in Germany are given.
Figure 1.1: Mobility in different labor markets (source: Emerson 1988)
labor turnover (in %)
Germany Sweden I 19705 • 19805
USA Japan
2. The Development of Labor Market Institutions in Germany: A Brief
Overview
The German labor market is certainly a market in which in addition to laws, strong unions and strong employers associations are negotiating about a substantial part of the working life. Some of the regulations clearly limit the degree of ^scretionary decisions for firms but there are also regulations which open opportunities and thus increase flexibility.3 Educational standards is one such case where regulations establish markets.
Another example is subsidized short-time work (see for an interesting evaluation Abraham and Houseman 1993) which opens up a short-term alternative to dismissals.
Some of Germany's regulations seem to be rather archaic for a modem industrialized society, as for example, regulated shopping hours which lead to overcrowded shops on Saturday mornings and in the evenings. Although this regulation seems to be anachronistic and inconvinient for consumer it may nevertheless be very efiBcient*
because trade is restricted to a few hours (Thurow 1988). However, although quite outdated this is not the most important regulation. Most of the criticism focusses on dismissal protection, codetermination laws and labor standards set in collective bargaining
Many economists in Germany followed the view of an overregulated, eurosclerotic labor market. The argument rests on the one hand on the cross-country comparison between Germany and the US and on the other hand on the longitudinal comparison of Germany in the 1960s with the late 1970s and 1980s. In the cross-national US-German comparison it is concluded from less regulated US labor markets with higher labor turnover and growing employment that more regulations in Germany led to lower turnover and less good employment performance. The results of these debates were suggestions for deregulation provided by a group of economists to the federal government.^
This section reports briefly some of the most important changes in laws and provides an overview for the following analysis. The succeeding sections analyze
3 FI&Yibility is used with several difierent meanings (for an overview: Beyer, R. 1987). Here it is defined as opponunities for actions. That is a greater variety of options increases fle.vibilit}'.
4 That is, that restricted shopping hours improveproductivity which is measured by the productnity of the employed only (measured in output per working hour or per per person employed) and disregarding time and effort of consumers.
5 See for an overview: Donges 1992.
whether the proclaimed malfunctioned of German labor markets can be found in the
statistics.
2.1 Social Security Insurance
Critics ofthe welfare state claim that social security affects incentives in two ways: (1) It distorts incentives for the employed because social security contributions lower individual incomes and these affect efforts negatively and (2) it reduces the incentives for those relying on the benefits of the system because it reduces their efforts as well.
Unemployment benefits, for example, reduce the pressure to accept jobs, lead to less intense searching for work and thus pushes the reservation wage up.^ Contributions to the social security system - which are evenly shared by employees and employers - have indeed increased substantially in Germany: In 1963 the overall contribution (employers' and employees' contribution) was 25%, in 1976 it was 32.5% and in 1990 it was 36% of the gross income. The main subsystem of social security in Germany - the unemployment insurance, health insurance, pension insurance - will be discussed briefly.
unemployment insurance
Probably the most important part of the social security insurance system with respect to labor markets is the unemployment insurance which provides a broad range of services.^
First of all it is an insurance against income losses [unemployment benefits are currently 68% of the net income (63% for singles respectively)], it administrates unemployment assistance - a means tested fall back position for those who's unemployment benefits
6 Giersch et al. (1992: 204) argue that unemployed workers are freed to accept jobs which pay less
than 50% oftheir pre\ious job because the soci^ security system provides an alternative income. The
wage differentials chosen for the e.\ample makes clear that the social security system provides an impediment against substantial income losses and thus sets up an barrier against overly downward wage flexibility. Burtless (1983), however, finds that high replacement rates in Europe caimot explain the US-Europeandiflemce in unemployment rates.
7 See also Buttler/Walwei in this volume.
have expired (usually after 1 year) it provides training measures, finances public work
programes (ArbeitsbeschaifiingsmaBnahmen), etc.^
One fi-equently mentioned explanations for high German unemployment is the generosity ofunemployment benefits. But the share of unemployed persons who received unemployment benefits, either unemployment insurance benefits or unemployment assistance decreased ft^om about 75% in the 1960s to roughly 65% in the 1980s.
Furthermore, the share of the unemployed who collect unemployment benefits is higher when the unemployment rate is low (Schettkat 1992a). The composition of unemployment benefits changed in favor of unemployment assistance (Arbeitslosenhilfe) which is means tested and lower than unemployment benefits. In the beginning of the 1970s less than 10% of the unemployed received unemployment assistance, but in the mid-1980s this share rose to more than 25%. At the same time, the share of the unemployed who received the higher unemployment insurance benefits decreased fi-om 65% to less than 40% (Cramer 1986, Ermann 1988).
The decreasing share of beneficiaries among the unemployed might be explamed by a different composition of unemployment sources. A higher inflow from "not in the labor force" (nonparticipation) would bring about a decline in the share of those who are eligible for unemployment benefits. In other words, the composition of the inflow into unemployment by origination might be important. The inflow fi-om nonparticipation into unemployment as a share of the overall inflow rose substantially from the mid-1970s, while the share of flows from employment into unemployment dropped accordingly.
Nonparticipation as a source of the unemployment inflow gained importance, and those coming from nonparticipation are usually not eligible for unemployment benefits. Thus, the composition of the inflow explains part of the decreasing share of recipients of unemployment benefits. Long duration of unemployment can lead to a decrease in the share of persons who receive employment insurance benefit as well. The period during which unemployed persons can receive unemployment insurance benefits is limited to 12 months (some exceptions, were introduced in the mid-1980s, which extended the periods for older workers , see Maier and Schettkat 1990). After that period the unemployed might receive unemployment assistance, which is less than the insurance benefits, and eligibility for unemployment assistance depends on household income (income tested).
Not only did the share of beneficiaries decrease but the incentive (the replacement rate) as well. This result is evidence countering attempts to explain high German
8 Parts of the cost of these provision and services(unemployment assistance, for e.\ample) are financed by overall ta.\es instead of insurance contributions (see: Schmid, Reissert and Bruche 1987).
unemployment rates by pointing to unemployment benefits. A similar result was obtained for the US (Burtless 1983).
health insurance^
In case of absence fi'om work caused by sickness the employee receives his wage up to 6 weeks from his employer. The socialdemocratic/fi-ee democrats government extended the continuation of income payments to blue collar workers in case of sickness (Lohnfortzahlung im Krankheitsfalle). Up to this point it was legally provided to white collar workers only although collective agreements may have already included blue workers in this provisions. If a worker after 6 weeks is still not able to work, the health insurance - which is obligatory for allmost all employees - will pay a means tested health insurance benefits. The employment contract continues during this time. Health costs have risen substantially in recent years.
pension insurance
The pension system was substantially revised in 1957 when the so called dynamic pension, which links pensions to income trends, was introduced. The next big reform was the introduction of the "flexible retirement age" in 1973 which allows workers to retire at 63 instead at 65 without any actuarial adjustments of their pension. Although this measure was introduced for social reasons it turned out be an effective labor market measure in the 1974 recession (Schettkat 1987). In addition the pension age for the disabled has been reduced and pensions for those people who have to stop work because of health reasons gained importance. Another important measure is the pension for long- term unemployed which provides a pension fi'om age 60 after an unemployment period of 12 months. Distinguishing the unemployed by one year age groups shows that leaving unemployment into nonparticipation peaks at the age of 60 years and accounting for
9 Contributions to the health insurance have increased continuously.
10 For small firms an insurance againstthe cost of continuation of wage payments exists. Currently it is debated whether the first two days of a sickness should be excluded fi^om the continuation of wage
payments.
more than 93% of those who leave unemployment at this age. In the older and younger age groups, this shareis much lower (ANBA 1989: 661). In this way unemployment has become the first step into early retirement, and also leads to long durations of unempbyment for older unemployed.
Early retirement was a widely used measure to reduce a company's labor force in West Germany (Kiihlewind 1988). It is an instrument for companies to reduce both the size and the age of their workforce and to improve the skill structure (Schusser 1987).
Although measures were taken to prevent firms from using unemployment as an entry into early retirement (Maier and Schettkat 1990), it is still important.
The outcome of this trend to early retirement is that the older unemployed are not regarded as candidates for vacant jobs by employers, and most of them do not expect to find a new job. In this sense they are not part of actual labor supply, either in the employers' view nor in their own view. It is hard to label this process in insider-outsider terms since it is the core group of the insiders who becomes unemployed. And it is difficult to label this process as hysteresis because preselection is already made with the understanding that the dismissed older workers are "early pensioners," although they have to suffer unemployment for some time. This process, however, might not occur m times of tight labor markets and not without political measures that at least support this process (Schettkat 1992a).
2.2 Collective Bargaining
The right to form coalitions of employees or employers is guaranteed in the German constituion (Artikel 9 GG). Germany is less exceptional with respect to the degree of unionization (which is about 35%) but much more with repect to the degree of organization of employers (more than 90%, see Keller 1991). Collective agreements define wage rates, wage differentials between skill groups, working times, holidays and the like. Collective agreements can be extended to those employers who do not belong to employers association if it is required by unions or the employers association. The legal extension of collective agreements is important mainly in construction and retail trade where several small employers exist.
Government should not intervene in collective bargaining (Tarifautonomie). Unions and employees are obliged to refrain fi-om taking strike action during the period of collective bargaining. Only after a collective agreement is terminated and a new contract
could not agreed on, can unions call for strike action, in which case it has to be supported by a substantial majority of its members. Employers can lock out workers in
the case of conflict
Although strike activity is quite low in Germany a few conflicts have been solved after substantial action only. The most prominent strikes are the 1956/57 strike in Schleswig Holstein's metal industry where the main goal was the continuation of wage
payments in case of sickness'^ the steel workers strike about working time reduction in
1978, the printing workers strike on the introduction of new technology, employment protection and training in 1978,the metal and printing workers strike on shorter workinghours in 1984 '2^ and the strikes in Banking and the public service in 1992'^. Probably
the most important fact is that the last two strikes were about wages whereas the former conflicts were on more general working condititions.Collective bargaining is important in Germany but the view of Germany as a country with centralized wage negotiations is certainly overstating. Although the metall workers union (IG-Metall) may be identified as a wage leader there is substantial variation in wage levels and wage increases across industries (Wagner 1989). Nevertheless, in comparison between the US and Germany, the former can be characterized as an economy with highly decentralized wage setting and highly flexible wages whereas German wage setting is certainly more centralized and less flexible but not uniform (Bell
1986, Vogler-Ludwig 1985, Schettkat 1992c, Bellmann/Moller 1993).
2.3 Codetermination
Two levels of codetermination have to be distinguished: codetermination at the plant level and at the firm level. Employees in all establishments with more than 5 workers have the right to form a works council. In 1972 a new works constitution act (Betriebsverfasungsgesetz) was introduced which defines that management in
11 Currently there is a debate on wether wage payments should continue after the 3rd day of sickness only.
12 During this conflict the conservativegovernment took clear position against a shorter work week and offered as an alternative an early retirement program which was favoured by some unions as well (see Scharpf and Schettkat 1986).
13 In 1993 a strike over the fulfillment of a collective agreement which defined the increase of wages in East-Germany took place.
establishments with 20 or more employees needs the approval of the works council in case of dismissals, In all establishments with works councils management needs to consult the works council in case of dismissals. Management also needs to negotiate in case of substantial overtime hours and short time work and in case of mass dismissal (see for the definition under employment protection) about severance payments (Hase/
Neumann-Cosel/Rupp 1992).
The spirit of the works constitution act is based on truthfull cooperation of works councils and management and in case of conflict arbitration committees (Einigungsstellen) are established which are chaired by a person who needs to be accepted by both sides. Works councils are obliged to keep peace and are not allowed to
call for strikes.
At the firm level workers are represented in the supervisory boards. The codetermination act of 1976 defines that in all corporations outside of steel and mining - where stronger codetermination rights "Montaranitbestimmung" apply - with more than 2000 employees, half of the seats on the supervisaiy boards are reserved of worker representatives who must represent the main groups of employees (blue collar, white collar, middle management) and who are elected partly by the corporation's employees and partly by the unions. However, the chairman of the supervisory board cannot be elected against the vote of the capital owners and in case of conflict the chairman has two votes. This guarantees that the final decision is allways made by capital.
At the macroeconomic level the a so called "konzertierte Aktion" (concerted action) which was established after the recession of 1967 by the socialdemocratic minister for economic affairs, Karl Schiller, should serve as a measure of coordination. The concerted action group consisted of leading representatives of the employers association, unions and the government. This group was intended to provide an instrument for macroeconomic coordination in order to avoid conflicts through mutual information and
discussion of macroeconomic relations. Rumors on whether it was effective or not are
numeros. The unions refused to participate in this group after the employers association brought the introduction of the new codetennination law (1976), which was already regarded as a compromise compared to the "Montanmitbestimmung", to the supreme court which in 1979 decided that this law is compatible with capital owners rights
defined in the constitution.
14 ITa wnrks council exists
10
2.4 Employment Protection
As a rule, labor contracts are unlimited contracts in Germany although some qualifications apply. With the employment promotion act of 1985 the government followed the idea that employment levels can be increased if fixed term contracts are allowed for. Such contracts had been legal before but under the employment promotion act no reasons for the limitation of the contract need to be stated anymore. The main law regulating employment protection is the "Kundigungsschutzgesetz" (employment protection act) from 1969 which states that dismissals have to be justified by economic reasons or reasons related to the performance of the employee. Employers are obliged to investigate alternative to dismissals that is that they have to offer other comparable Jobs in the firm - if available - even if this requires some training. Unjustified dismissal are illegal. Dismissals as well as hires need the approval of the works council which however
has to follow rules as well.
Unless voluntary severance is agreed on, notice must be given fi-om two weeks to six months prior to dismissal, depending on age, seniority, and occupation. In case of collective dismissals, the works council must be consulted. For establishments with 60 to 250 employees, dismissals of more than 10% of the workforce are considered collective.
The 1969 Protection against Dismissal Act made the employer liable for the cost of up to six months retraining in case of inadequate notice. The 1972 Works Constitution Act
required that management and the works council negotiate a social plan specifying
compensation for those collectively dismissed (Hase/ Neumann-Cosel/ Rupp 1992). Themedian social plan called for severance pay equal to 5 to 10 months earnings
(Sengenberger 1987).
Apprentices, although legally employees, get contracts limited to their training
period. The contracts terminate when the apprentice passes his examine and the firm is
fi'ee to offer the fi'eshly launched skilled worker ("Facharbeiter") a regular employment contract but the firm is by no means obliged to do so. Apprentices are, however, an excellant pool for recruitments. If a firm hires its own apprentices, it hires employees who already have firm specific knowledge, who's occupational skills are taught by the firm itself who's performance have been evaluated over about 3 years, and who are in some way insiders^5.15 See Franz/Soskice, in this volume, for an evaluation of the ^stem.
11
2.5 Summary of Institutionai Changes
Many of the laws affecting labor markets have been introduced in the late 1960s and the 1970s and clearly have increased employees' rights. However, as it is mistaken to believe that a uniform wage rate determined by the metall workers' union exists in Germany, it is also a mistake to believe that an employment protection law will exclude dismissals. Thereis wage variation although much lower than in the US and it is possible to dismiss workers but dismissal needs to be justified. Nevertheless, the extension of employees' rights coincided with the incrase in unemployment and it was natural to investigate whether a causal link between these tow events exists. The "natural" rate of unemployment may have increased because of these institutional changes. It will be investigated in the next sections whether trends in the dynamic of the labor market support this view.
12
3. Explaining the Declining Mobility in the German Labor Market
The average duration of unemployment in the US was very stable over time (see Table 3.1) compared to the German trend. In Germany the average duration of unemployment increase with every recession from 1974 on. Longer durations of unemployment are in Germany reflected in declining job finding rates (hires from unemployment divided by unemployment)^® which declined substantially in the middle of the 1970s and again in the 1980s (see Figure 3.1). This seems to be support for the hypothesis that the German labor market has become sclerotic. But a declining job finding rate indicates, first of all, that it has become more difBcult for the unemployed to find a job which is not necessarily caused by a malfunctioning of the labor market. Even with constant absolute hiring figures and rising unemployment, one Avill end up with a story that claims overly static labor markets if one relies on the job finding rate.
Table 3.1 : The distribution of unemployment by duration in the US and in Germany (in
%)
years USA
duration in weeks
<5
1
115to 26 11 >26 >52 >104 median averagel average21975 41.80 25.41 12.95 19.33 n.a. n.a. 8.40 14.20 n.a.
1980 43.13 30.74 14.76 11.36 n.a. n.a. 6.50 11.90 15.59
1985 46.04 28.76 10.65 14.55 n.a. n.a. 6.80 15.60 8.86
1990 46.10 32.00 11.80 10.10 n.a. n.a. 5.40 12.10 14.24
1991 40.10 32.30 14.50 13.00 n.a. n.a. 6.90 13.80 15.43
FRG durafion In weeks
<4
14tOl1 112 to 25 1
>25 >52 >104 median averagel average21975 16.41 25.53 21.23 36.83 9.60 1.28 n.a n.a 15.50
1980 17.66 27.50 18.62 36.22 15.72 7.40 n.a 27.73 15.91
1985 12.32 20.16 15.83 51.69 22.40 14.07 n.a 50.27 32.43
1990 14.10 21.10 16.20 48.51 24.23 15.90 n.a 57.63 26.87
1991 15.20 23.10 16.40 45.27 23.53 15.20 n.a 58.07 27.40
Source: BLS; Employmentand Earnings, Bundesanstalt (Or Arlielt(ANBA)
FRQ; The original d^aIs grouped by the month. Weeks are therefore approximations only
averagel b duration of the unemployed at September 30. in the FRG; annual average of duration of the unemployed in the CPS.
averagoE s durationcomputed under the steady state assurr^ttfon(durations stock / outflow)
16 the higher the demand for labor (\'acancies} and the higher the excess supply of labor (unemplo>-ment), the more contacts can be made (given a constant search intensit)')-
13
If Other reasons for unemployment, like demand deficiency, are allowed for, a hiring index which is independent from actual unemployment may be more appropriate.
Moreover, if competition within and between industries, labor laws, industrial relations etc. are claimed to influence hiring decisions -or more general labor turnover- one expects that hiring depends on the size of the economy, which may be measured by employment. One such indicator is hiring from employment and from "out of the labor force" divided by employment (hiring rate). This ratio produces a diflferent picture of labor mobility in the German labor market (see Figure 3.1). The odds for the unemployed to be hired (job finding rates) have dropped dramatically but the hiring rate (luring from employment) has increased.
Nevertheless, overall hiring as a ratio to employment has fallen in Germany from the early 1970s (see Figure 3.2), but hiring can be made from nonemployment (unemployment and out of the labor force) and from employment. Intraemployment hiring has decreased substantially in Germany since the early 1970s. Although there are some measurement problems in the data (see Rudolph 1984, Reyher and Bach 1988) the difference between the overall hiring ratio and the ratio for hiring from nonemployment can be taken as a good approximation for intraeraployment hiring.
The probabilities for hiring from the two origins (nonemployment and employment) is influenced by the tightness of the labor market. In a tight labor market hiring takes place more likely from the ranks of other firms' employees because the pool of the nonemployed job seekers is small and this most likely causes subsequent hiring activity in the firms that lose employees.
The effect of hiring on vacancies and thus on sucessive hiring activity can be described as a multiplier process. Supppose that in t=l a once for all increase in the
number of vacancies occurs and that these vacancies are filled. If hiring is made from nonemployment, the process stops but if hiring is made from employment, that is from the ranks of other firms' employees and given that this firm did not plan to reduce its' workforce, hiring to replace the worker will take place and the process continues; a hiring chain occurs (AkerlofrRose/Yellen 1988, Schettkat 1992a). The impact on hiring activity in the economy of an once for all increase in jobs, therefore depends on the probability with which initial hiring is made from employment.
17 For large ts the sum of vacancies created by this once for all increase in jobs would follow a geometric distribution.
V = dv + dv prob{e) + dv prob(e) +....
for large t: V =dv l/(l-prob(e))
with; V = sum of additional vacancies; dv = increase in vacancies (jobs, hires); prob(e) = probabilit}- that hiring is made from employment (intraemployment hiring)
14
Figure 3.1: KUring from nonenployment as a ratio of employment and asa ratio of unemptoyment in Germany (1970 -1988>. In %
25
20
15
10
5
hires per employee (hiring rate)
hires per unemployed (job finding rate)
Kres from nofremntownent per emtalovee
hires from unemployment oerimemoloved
70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 Source:ComputalkHS are based on t>eArt)eit5lffa£lleges3ntrecrning(Reytar and BactilSSS).
Note: Hres per eindayee (hirtng rate)are computedbyliirestromunerrployrnem and ncnpertlapailcn (Mded by errpioyinera.
Kres per unemployed (jobflrdng rate) are computedtytaesrramunemployinent dvidedby the unemployed.
600 500 400 300 200 100
Rgure 3.2: The ratio of overall hires, intiaemployment hires, and hires from nonempioyment employment fbr Germany (1970-1389)
^ hiring ratio (% of employment)
overall hinnos
inlraemolovment hmno
15
hirinosfrom nonemdovment
10 1 1—I 1 1 1 1 i 1 i 1 1 1 i 1 i 1 i 1 1 1
70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91
Source: Compulationsare based on the Artratskrafiftegasairtrechnung (Reyher and Bach 1968).
Rudolph1964 and oOrerdata or the BundeaanstatttuerArtierL
Note; The overall Mitng rale Is computed as overall hiresdvlded byiliitlal eneloymenL 7)ie nonenplayment hirtng ratiois computed byan harestrcmunemployment and norwtidpetion dvided ty emptoymenL
15
The probability that hiring will be made from employment [prob(e)] obviously depends on the quantity of excess labor supply and its quality, ^£smatch between labor demand and supply would reduce the pool of the nonemployed regarded as potential candidates in the view of employers and hence increases prob(e). A large influx of youngand skilled workers in the pool of the unemployment on the other hand would most likely reduce prob(e). However, prob(e) also depends on the specific labormarket. It will be higher for jobs of highly skilled, experienced workers than for less skilled jobs. For the economy as a whole prob(e) will depend on the economic situation. In recessions whha large pool of unemployed it will be more likely that hiring can be made from amongst the unemployed whereas in booms it will be more likely that hiring is made from employment.
If the decrease in intraemployment hiring in Germany is caused by a shorter hiring chain, that is that recruitments are increasingly made from nonemployment and thus do not cause additional hiring efforts, one expects a negative relation between intraemployment hiring (job-to-job mobility) and the excess supply of labor. In the absence of mismatch the unemployment rate would be a good indicator for the excess supply of labor (Dow and Dicks-Mireaux 1958). If, however, hysteresis effects or mismatch occur, part of the unemployed would not be regarded as actual labor supply and the unemployment rate would consequently overestimate actual excess labor supply.
There is empirical evidence for Germany that hysteresis processes -caused by preselection in interaction with pension laws and low labor demand- have occurred after the 1982 recession (see Schettkat 1992a). A simple regression of intraemployment hiring on the unemployment rate as a proxy for excess labor supply, and the share of long-term unemployment in overall unemployment as a proxy for mismatch produced the following
result:
LIEH = -1.82 - 0.32 UE + 0.03 LUE
(-10.9) (-5.4) (1.9)
Maximum likelihood first order autocorrelation regression
R2(adj) = 0.89, Durbin-Watson = 1.6; Rho = 0.32 (1.1), N = 20, time period: 1970 to 1989, t-^'aJues in parantheses
tvith:
LIEH = intra-employment hiring divided by employment (EEH) transformed to log (lEH [%]/ (100-IEH [%])
UE = unemployment rale (registered unemployment divided by dependen labor force (in %)
LUE = share of long-term unemployment (more than 2 years) in overall unemployment
16
The regression equation suggests that a one percentage point increase in the unemployment ratio (the excess supply of labor) reduces intraemployment hiring by 32%.
An increase in the share of long-term unemployment of 10 percentage points reduces intraemployment hiring by roughly 3%. This result is consistent with the hiring chain model and suggests that the drop in the overall hiring ratio in West Germany which is due to decreasing intraemployment hiring is mainly caused by a shortening of the hiring chain. This, however, is hardly an indicator for worsening labor market mobility and even less for worsening flexibility, but rather the effect of macroeconomic conditions on micro level activity. Since a long hiring chain produces a lot of hiring costs in the economy, a situation when firms can satisfy their labor demands from nonemployment represents a situation of high flexibility gains (Schettkat 1992a). Hiring activity in the economy cannot be explained from the micro perspective alone but it is, instead, strongly influenced by macroeconomic labor market conditions.
17
4. Analysis of the Functioning of Labor Markets
Variations of aggregate demand are usually identified with movenments along a stable Beveridge curvewhereas variations of the pace of structural change, of mismatch, and of
thefiinctioning ofthe labor market are identified with shifts ofthe curve^^. The matching
function is a more general method for the analysis of changes in the functioning of labor markets although related to the Beveridge curve. The matching function can be interpreted as a production function which combines two input factors, vacancies and unemployed. The higher the unsatisfied demand for labor (vacancies) and the higher the excess supplyof labor (unemployment), the more contacts can be made (given a constant search intensity) and the more contracts can be made (hires, given stable hiring standards and a suflHcient skill mix). Changes in the functioning of labor markets will be identified by changing coefiicients or by changes in the fixed term. A third method for the analysis of the fiinctioning of labor markets are change-duration curves in which unemployment and vacancies are decomposed into a flow and a duration component.4.1 Beveridge Curve Analysis
Figure 4.1 displays Beveridge curves for the US and Germany for the period 1963 to 1985 and 1970 to 1991, respectively. For the US the general picture suggests an outward shift of the Beveridge Curve fi'om the 1960s to the 1980s (see Figure 4.1)."
The Beveridge curves shows a rightward shift with every recession from 1963 to 1982, but since then the curve seems to have shifted leftwards. Contrary to the German data the outward shifts are in the US less pronounced in the adjusted^® than in the unadjusted data, but they are visible in both curves. The visual inspection of the German curve suggests breaks in the function in the middle of the 1970s and again in the early 1980s.
Wolfgang Franz (1987, 1991, Franz/Siebeck 1992) published several very sophisticated econometric analyses of the German Beveridge curve. The result of an analysis for
18 Although recent analysis shows that shifts of the Beveridge Curve can have many causes (see:
Borsch-Supan 1991, Schettkat 1992a)
Vacancydata for the US is constructed with the "help-wantedindex," which is based on the number of help-wanted advertisements. The base year for the index is 1967. To control for the expansion of the economy, the help-wanted index is normalized by dividing it by the number of nonagriculutural emplt^ees (see Medoff 1983). A comparison of the normalized help-wanted index with vacancy data collected in surveys in some states showed that the normalized help-wanted index seems to be a reasonable pro.xy for vacancies (Abraham 1987: 213).
Adjustmentsof the help-wanted index have been made by Katharine Abraham (1987) to adjust for the shift to white collar workwhich is more heavily advertise.
18
breaks in the function was summarized as follows (Franz/ Siebeck 1992:32): "The entire regression period from 1961 to 1988 is characterized by three significant breaks which caused changes of the slope and the location of the curve. In 1975 the structural relation was changed by a significant intercept dummy and the slope of the second curve is flatter. In 1980we found a significant impact of a slope dummy: the curve shifrs out and is flatter for the empirically relevant levels of v (vacancies, RS). The last interruption in 1983 was caused by both types of dummies: The curve shifrs out but at the same time it becomes very steep,
Figure 4.1: The US and the German Beverldge curve US Beveridge curve
normalized help-wanted index, adjusted
0.6 T
German Beveridge curve
14 12
10 8 6 4 2
adjusted vacancy rate
• 1970
1980 1991
0.08 0.1
unemployment rate source: BLS data and Abraham 1987 for the adjusted help-wanted index
1983
8 10
unemployment rate
source: Bundesanstalt fur Arbeit and Schettkat (1993) for the adjusted vacancy data
21 The shifts in the Beveridge curve using correctedvacancy statistics are more pronounced than in the
unadjusted data, but the shifts do occur in the original data as well (see Schett^t 1993).
19
The Franz analysis continues by investigating the impact of various mismatch indicators.
If mismatch is the cause for changes in the Beveridge curve described by the dummies, then some of the structural breaks may be explained by variables representing mismatch.
The indicator for unskilled mismatch, which is defined as the difference between the aggregate rate of vacancies for unskilled workers and the rate of unskilled unemployment, can capture some effects of the dummy variables. This indicator developed in line with aggregate unemployment.22
An indicator for occupational mismatch dropped substantially over time (Franz and Siebeck 1991: 35). This is to say that skiU mismatch - at least as for as it is measured in the available statistics - did not, against popular views, increase from the 1970s to the 1980s. Slight increases of occupational mismatch indicators from the early 1980s to the late 1980s did not occur because labor demand (vacancies) increased in expanding occupations more than the supply of labor. On the contrary, the occupational mismatch indicator increased because labor supply in expanding occupation grew at a higher rate than labor demand. The increase in the mismatch indicator is thus caused by a lead of labor suplly against labor demand which is certainly not the meaning of increasing mismatch we have in mind if we use this term (see Schettkat 1992a, and 1989).
In a regression with the rate of unskilled long-term unemployment as the mismatch indicator only an intercept dummy for 1983 is reported and this now has a significant negative coefficient (Franz and Siebeck 1991: 44). Controlled for long-term unskilled unemployment the outshift of the Beveridge curve now becomes an inward shift (estimating period 1974 to 1988). The mismatch problem thus was mainly a problem of unskilled, long-term unemployment and Franz and Siebeck mention that long-term unemployment is not exogenousto the unemployment process but rather endogenous.
4.2 The Matching Function
The analysis of the functioning of labor markets using the Beveridge curve requires strong assumptions: A stable Beveridge curve requires constant hires (it is an iso-hiring- curve) or in other words variations of hires will shift the Beveridge curve although this is not necessarily related to changes in the functioning of labor markets. The Beveridge
22 The rate of unskilled uneinplc^ent and the rate of long-term unemployment were additional
indicators used by Franz and Sie^k (1991:45).
20
curve is stable only under the condition of constant hires. This can easily be seen if the matching function:
lnH'(t,t+l) =InC +a lnU(t^t+l) + 3 lnV(t,t+i) (^- 0
is written in the usual Beveridge curve formulation:
+ (4.1a)
with:
^(t t+i)= cumulated hires (matches) during the period from t tot+1.
C ='constant U = unemployment V = vacancies
Constant hires - the condititon for a stable Beveridge curve - together with the common assumption of a fixed labor force (which allows for mobility between employment and unemployment only) leeds variations in vacancies and unemployment to be caused by variations of duration only because the flows are fixed. This is to say that high unemployment is caused by long unemployment duration whereas vacancy duration
will be short in this situation. This is in line with the theoretical foundations of the
Beveridge curve developed by Dow and Dicks-Mireaux (1958). They argued that given low unemployment, hiring will be difficult and will thus lead to long vacancy durations whereasunemployment durationwill be short in this situation. However, the formulation of the Beveridge curve as in formula (4.1a) shows that variations in hiring (caused by a higher pace of structural change, shorter durations of employment contracts, or an expansion ofemployment; see Schettkat 1992a) lead the curve to change its position.
An estimationofthe Beveridge curve including a variablefor variations in hires produced the following result:
ut = ^0.17 + 0.02 — + O.S.longue + 16.9.Sub-ue - 2.9.d831 V,
(-.49) (12.2) (7.5) (4.7) (3.7)
= .976, DW = 1.79, t-values in parantheses, period: 1970 to 1991
with:
ut = imemployment rate [registered imemployed, averageover the year divided by labor force (employees plus unemployment)]
vt =vacancy rate [report^ vacancies, average over the year divided by labor force]
longue = share of long-termunemployment (2 years and more) in all unemployment sub-ue = substitution rate of ofthe exchangebetween unemployment and employment
divided by employees [sub-ue = 0.5.(ue+ eu -jue- eu|), where ue is the flow from
21
unemployment into employment divided by employment; eu isthe flow from
employment into unemployment]The estimation suggests that increases in the substitution rate for the flows between employment nnd unemployment have shifted the Beveridge curve outwards. Controlling
for the flows and the share of long-term unemployment lead a dummy for 1983 to be negative.The basic idea behind the matching function is that matches (hires) are more easily made the more persons are unemployed and the more vacancies are opened (Jackman, Layard and Pissarices 1989, Blanchard and Diamond 1989). The probability of a contact under the assumption that workers contact a specific vacancy only ones is then given by:
prob(contact) = V / U (4.2)
The specification of V and U is important because it has a strong influence on the calculated contact probabiltiy. Commonly the stocks of V and U are used in analyses but stocks are the result of inflows and duration. Because the contact probability depends on all vacancies which exist during a certain period and the number of persons who search for a job during the period, flows rather than stocks should be used for the specification of the variables if durations are substantially shorter than the period and if duration
varies.
Blanchard and Diamond (1989) estimated for the US the matching function displayed in columns 1 and 2 of Table 4.1. They experimented with several different specifications and functional forms for the matching function but concluded that constant
returns to scale and the log linear Cobb Douglas function seems to be reasonable.23
There arc several specifities with respect to the construction of the data used by Blanchard and Diamond. Hires have been constructed as the flow from unemployment and from out of the labor force into employment (taken from the CPS series adjusted bj' Abowd/Zellner 1985) plus job-to-job mobility which they assume to be constantly 40% of all quits which are estimated by the manufruxuring quit rate. Quits are highly procyclical and on average job-to-job mobility is equal to half the flow from unemplq>ment to employment (Blanchard and Diamond 1989: 22). However, job-to-job mobility in Germany shows a very different pattern (see Figure 3.2). The vacancy indicator has been developed by Katharine Abraham (1987) and is based on the so called help-
wanted inde.\.
It is important to note that the Blanchard and Diamond analysis is based on flow data for hires and on quasi flows for vacancies (which is the integral over the stocks of help-wantedads over a month) but for unemploymenta stock (middle of the month) is used.
independent USA Germany
variables (Blanchard/ Diamond)* Buttler/ Cramer*"
all hires hires Irom hires from unemployment" all hires" mediated
unem hires
ployment from-
unerrployment
1 2 3 4 5 6 7 8 9 10 11
constant 0.52 1.84 2.19 3.67 -1.77 4.29 6.80 2.45 3.65 1.64 -1.79
7.50 1.10 1,90 1.16 •0.54 3.66 12.28 4.87 9.78 2.61
U 0.35 0.59 0.67 0.04 0.54
3.90 2.90 6.61 0.85 2.60
Uin 0.85 0.91 0.82 0.03 0.02 0.07
4.50 5.73 3.99 1.09 0.98 1.97
V 0.54 0.21 0.19 0.24 0.45
6.90 3.30 1.99 5.28 3.60
Vin -0.35 0.39 -0.40 0.68 0.52 0.74
•1.53 1.20 •1.49 18.81 14.20 16.22
EiEj -0.20 0.04
-2.86 5.54
trend/100 -0.15 -0.02 •2.96 0.80 -0.11 0.09 0.35 0.22 0.42 0.09 -0.36
•2.40 •0.20 •3.24 1.14 •0.17 1.19 0.79 1.91 5.42 0.77 •1.70
Method OLS • OLS OLS OLS OLS IV' OLS OLS OLS IV' OLS
R2 47.00 41.00 95.87 91.15 94.14 97.62 89.80 97.65 99.19 91.98 84.00
SER 0.07 0.10 0.08 0.10 0.03 0.02 0.01 0.02
DW 2.40 0.80 1.06 1.18 1.19 1.23 1.59 1.82 1.76 2.34 1.21
data monthly monthly annual annual annual annual annual annual annual annual monthly
period 68:2-81:12 68:2-81:12 71-91 71-91 71-91 71-91 71-91 71-91 71-91 71-91 83:1-90:12
U = unomploymont (stock) Uln = Inflow Into unemployment ElEj= |ot>-to-|ob mobility italics s l-valuos V=vacancies (stock) VIna inflowof vacancies all variables In logs
* unemployment and vacancies lagged 1 month; vacancies are the integral of the stocks of hefp-wanted ads over the month (Blanchard/ Diamond 1989:25);
unemployment Is unemployment In the midcflo of the month; In regression 2 constant returns toscale are imposed and unemployment Is unemployed workers minus laid off workers plus out of the labor forco but want a job
" adjusted vacancy Inflow (see Schettkat 1993)
*" unemployment and vacancy at the end of the month
fV = VinInsljumontodon EIEj-1, EIE] fV" = VinInstrumented on EiEj-1. ElEj
-)
i:
fT 4i.tn a
a t o
O
0
f
1
a o's
c/) K)
N)
23
Estimates of matching functions in Germany are shown in columns 3 to 10 Hiring from (registered) unemployment can be expected to depend on the size of the pool of the unemployed as long as the unemployed match the skill requirements of jobs. The flow from unemployment to employment is expected to increase whenever the pool of the unemployed expands because hiring froni unemployment is an alternative to hiring from employment (job-to-job mobility). It reduces the compensatory component of vacancies and thus shortens the hiring chain. Overall hires (hires from unemployment plus job-to- job mobility), on the other hand, are expected to be high whenever the hiring chain is long, that is when it is difficult to hire, when job-to-job mobility is high, and when unemployment is low. That is, that vacancies are partly endogenous to the labor market situation.25 Therefore, it is likely that OLS estimates of the matching function are biased if the length of the vacancy chain varies, that is if the excess supply of labor varies. The regressions for hires displayed in Table 4.1 confirm these considerations.
In the regressions for hires from unemployment (columns 3 to 6 in Table 4.1) the vacancy stock is significantly positive (equation 3) and remarkably close to the estimates of Blanchard and Diamond for the US (column 2).^^ Vacancy inflows, however, show a negative although insignificant coefficient (equation 4). This indicates the sensitivity of matching function estimates to the specification of the variables. The time trend is significantly negative in the estimates using stocks but it is insignificant if flows are used.
Including job-to-job mobility (EiEj in equation 5) leaves the time trend and vacancies to be insignificant. The instrumental variable estimation (colunrn 6) produces a similar pattern. For overall hires the relevance of the variables is almost the revers. Here it is vacancies which is highly significant (see colunms 7 to 10 in Table 4.1) and
Testson the stationarity (the null) of the >'ariables used in the regressions (seeTable4.1) were insignificant.
O'erall vacancies in the economy can be decomposed into a component representing expected
^'aiiations in the employment level and anothercomponent representing compensatory hires;
V = 6 + C; where: V =vacancies (flow), E=expected chang inemployment level,
C = compensatory hires.
Buttlerand Cramer (1991) estimatea function for mediatedhires regressed on unemployment and
>'acancies stocks. Theyget coefBcients similar to thoseobtained byBlanchard and Diamond.
24
unemployment is insignificant in OLS regression but significant in the intrumental variableestimation(column 10). the trend is positive but not allways significant.
4
The regressions suggest that the pool of the unemployed influences hires fi-om unemployment substantiallyBut this is not to say that employment or hiring as such is labor supply determined. Rather it means that hiring fi'om unemployment is shortening the hiring chain and thus leads the coefBcient of vacancies (gross labor demand) to become insignificant or even negative. The time trend, although not allways significant, for hires fi'om unemployment as well as for overall hires is positive if the variables are specified in flows rather than in stocks. A positive time trend indicates an improvement ofthe functioning ofthe German labor market instead of an deterioration.
This result is in contrast to findings of Buttler and Cramer who found a negative time trend in their regression of mediated hires from unemployment (column 11 of Table 4.1). The divergence in trends may be explained by the different specifications of the variables, the method used, the different periods, but it may also reflect differences in the dependent variable (hiring from unemployment versus mediated hires fi'om unemployment). Mediated hires fi'om unemployment are not only influenced by the
functioning of labor markets but also by the efSciency of the mediation servive which
have deteriorated.
4.3 Change Duration Curves
Unemployment and vacancies can be decomposed into inflows and duration which are combined in change-duration curves (Schettkat 1992a). A pure business cycle, that is an aggregate shock which does not affect the skill composition in the economywill increase the vacancy inflow if the economy moves out of a recession (point A in the vacancy diagram of Figure 4.2). Increasing labor demand will be easily satisfied out of the large
In Layard/ Nickell/ Jackman (1991), for example, employed and unemployed job seekers are regarded as competing with each other about existing vacancies. Actually vacancies are substantially influenced by the compensatory component of hiring and are thus not exogenous but rather endogenousto the labor market situatioiL
25
pool of the unemployed and the duration of vacancies will remain low. At some point hiring will become more difficult. This point will be at zero unemployment in an "ideal"
labormarket with homogeneous labor and no frictions but in a real labor market, at some
positive level of unemployment, vacancy duration will increase until labor demand
actually diminishes (after point B). At the end of the recession the change-duration curve will arrive at point A again. The illustration of a pure business cycle for unemployment resembles that for vacancies but a recession is characterized by long durations of unemployment (point A in the unemployment diagram of Figure 4.2). Unemployment duration will shrink in the expansionary period and will be at the minimum in the boom (point B). Short vacancy durations occur with long unemployment duration and viceversa.
Increasing mismatch or an impaired functioning of the labor market is indicated by outward shifts of both the change-duration curves for vacancies and unemployment.
Each business cycle would occur at longer averagedurations than the preceding one.
The labor market is not a closed system and flows cross the borders. Allowing for flows across the labor force borders (i.e., an exchange between the labor force and "out of the labor force" and an increasing labor force, the vacancy and the unemployment curve can shift in different directions. It is possible, for example, that vacancies get filled with new labor market entrants. There is no recruiting problem at all, but the unemployed are regarded as less favorable (because of skill mismatch or simply because of signalling). Unemployment duration would shift outwards.
Figure 4.2 also displays the actual developments for Germany. Obviously the change-duration curve for unemployment has shifted outwards with every business cycle^^. The business cycle shows the discribed loops but each business cycle occurred at a longer duration. In the case of an increasing malfunctioning of the labor market a similar movement for the change-duration curve of vacancies is expected but here the business cycle loops occurred with shorter and shorter average durations. This is hardly support for the view that recruiting has become more difficult in Germany. Increases in the average duration of unemployment occured in the US as well (Figure 4.3). Here, however, on a much less severe level.
28 The average duration of unemployment and vacancies has been computed under the steady state assumption: dur = X/X', where dur = duration, X = Stock at t-1, X outflow during the period.
The steady state assumption is, of course, almost never fulfilled but it produces nevertheless a reasonable approximation (Freiburghaus 1978). Making use of the outflows leads the average duration to be unbiased by variations of the inflows.
26
Figure 4.2: Change-duration curves for unemployment and vacancies in Germany (1964 to 1991)
Unemployment
change of inflow (%)
Vacancies
25 20 15 10 5 0 -5 -10 -15 -20 -25
change of inflow (%)
.A
8 10 12 14
duration (weeks) Source: Computations are tiased on data ot ttte Bundesanstalt luer Aitjeit.
Note: The durations are computed with ttre steady state assumption, duration •= stock (tjeginning of the yearyoutflow over the year.
Figure 4.3: Change-Duration curve for US unemployment Unemployment
35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00 -5.00 10.00
change of inflow (%)
Source: Computations are based on BLS data.
Note; Average duration Is computed with the staedy state assumption, duration a stock (tieglnnlng ot the year)/outltow over the year.
duration
27
5. An Institutional Hysteresis Explanation for Persistent German
UnemploymentThe analysis of the vacancy chain concluded that the decrease in overall hiring activity can be explained by a decrease in intraemployment hiring. Job-to-job mobility declined because of changing macroeconomic conditions, that is an excess supply of labor. In tight labor markets more hiring has to be made from the ranks of the employed which creates succeding hiring activity and lengthens the hiring chain. The decline in mobility in the German labor market was the result of an excess supply of labor. Hiring from the ranks of the unemployed increased, whereas job-to-job mobilitydeclined. The analysis of the the Beveridge curve concluded that the apparent structural breaks in the curve disappear if control is madefor long-term unemployment. The analysis based on change- durations curves uncovered the rise in the duration of unemployment for every business cycle, which is certainly an indication for malfunctioning. At the same time, however, hiring was getting easier and the divergent trends in the change-duration curves for unemployment and vacancies have to be explained in terms of an interplay of macroeconomic trends and labor supply development. Although the duration of unemployment increased with age it cannot be seen as a variable solely determined by individual charateristics. It is certainlyinfluenced by macroeconomic labor demand.
The duration of unemployment is a positive function of age and, furthermore, the unemployed aged 50 years and older suffered from increasing unemployment duration even after 1986, whereas unemployment of the younger age groups declined slightly.
About 50% of the unemployed aged 55 to 60 years enter nonparticipation if they leave unemployment (ANBA 1989: 661) and for those who move from unemployment into
"out of the labor force", the duration of unemployment was almost twice as high as for those who leave unemployment into new jobs. Obviously, older unemployed face a lower job finding rate than younger workers.
But why are the elderly becoming unemployed at all in a system that provides so much employment stability? First of all, there is job turnover caused by the closure of establishments, but closures are only a small finction of overall job turnover. Contrary to all rumors in the community of economists. West German labor law allows for dismissals, but layoffs must be justified and often a "Sozialplan" (severance payment) has to be offered. A "Sozialplan" can also be an instrument to make unemployment
"attractive," and it is often agreed that older colleagues should leave because a pension offers them an "alternative" to work. It is common view, that it is better to have "young"
pensioneers rather than an unemployed youth. There are different ways of entering into
