Recessions and size of the middle class

a column by Joan Costa-i-Font and Alberto Batinti for VOX: CEPR’s Policy Portal

A sizeable middle class is essential to protect societies against socioeconomic and political instability.

This column examines the effect of economic recessions on the size of the middle class using different income-based and self-perception definitions. It finds that anticipated recessions do not produce an overall middle-class squeeze, but unanticipated shocks such as the Great Recession do. It also finds that recessions increase the share of the population that regards itself as middle class.

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Slow recoveries through fiscal austerity

a column by Francesco Bianchi, Diego Comin, Howard Kung and Thilo Kind for VOX: CEPR’s Policy Portal

During the Great Recession, several European countries implemented fiscal austerity measures to reduce sovereign debt.

This column argues that such policies affect the decision to adopt new technologies and can have negative consequences for productivity and growth in the medium run. Thus, low technology adoption due to fiscal austerity can lead to slow recoveries. These, in turn, can make the fiscal stabilisation unnecessarily costly.

Fiscal austerity is desirable only if it is able to quickly reduce the cost of financing debt.

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

a column by Reamonn Lydon, Thomas Y. Mathä and Stephen Millard for VOX: CEPR’s Policy Portal

Short-time work schemes are a fiscal stabiliser in Europe. Between 2010 and 2013, they were used by 7% of firms, employing 9% of workers in the region.

This column uses ECB data to show that firms use the schemes to offset negative shocks and retain high-productivity workers. High firing costs and wage rigidity increase the use of short-time work, which in turn reduces the fall in employment brought on by a recession.

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The powers and pitfalls of quantitative easing

a column by Wei Cui and Vincent Sterk for VOX: CEPR’s Policy Portal

The effects of quantitative easing are poorly understood, in part because standard models of monetary policy predict that it doesn't work.

This column uses a model in which households can be unequal and hold assets with different degrees of liquidity to show that quantitative easing can provide a powerful stimulus to the macroeconomy, and that it avoided a large decline in output and inflation during 2009.

Nevertheless, side-effects on inequality mean that social welfare tends to be lower under quantitative easing than under conventional policy.

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I still don’t understand what is being talked about and I feel that I should.

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Feeling useless: the effect of unemployment on mental health in the Great Recession

an article by Lídia Farré (Universitat de Barcelona, IAE (CSIC), MOVE and IZA, Barcelona, Spain), Francesco Fasani (Queen Mary University of London, CEPR and IZA, London, UK) and Hannes Mueller (IAE (CSIC), Barcelona GSE, CEPR and MOVE, Barcelona, Spain) published in IZA Journal of Labor Economics Volume 7 Article 8 (2018)

Abstract

This article documents a strong connection between unemployment and mental distress using data from the Spanish National Health Survey.

We exploit the collapse of the construction sector to identify the causal effect of job losses in different segments of the Spanish labor market.

Our results suggest that an increase of the unemployment rate by 10 percentage points due to the breakdown in construction raised reported poor health and mental disorders in the affected population by 3 percentage points, respectively. We argue that the size of this effect responds to the fact that the construction sector was at the center of the economic recession.

As a result, workers exposed to the negative labor demand shock faced very low chances of re-entering employment. We show that this led to long unemployment spells, stress, hopelessness, and feelings of uselessness. These effects point towards a potential channel for unemployment hysteresis.

JEL Classification: I10, J60, C26

Full text (PDF 34pp)

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The ‘Great Recession’ and low pay in Europe

an article by Carlos Vacas-Soriano (European Foundation for the Improvement of Living and Working Conditions (Eurofound), Ireland) published in European Journal of Industrial Relations Volume 24 Issue 3 (September 2018)

Abstract

This article contributes to the literature on low-paid work by analysing the shares of low-paid employment in the period 2006–2014 and the underlying causes.

I use an inflation-adjusted low-pay threshold anchored at 60 percent of median wages to assess the impact of the Great Recession, which increased the share of low-paid employees in two-thirds of European countries and in the EU as a whole. This was driven by a general decline in real wages, which was particularly intense in European periphery countries and at the bottom of the wage distribution as well as among employees with shorter tenure.

However, compositional effects either prevented a larger expansion of low-pay shares by masking the real extent of the wage correction or were generally negligible in driving low-pay shares. Moreover, growing part-time employment emerges as a significant source of low-paid work from the onset of the crisis.

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The effect of house prices on household borrowing: A new approach

a column by James Cloyne, Kilian Huber, Ethan Ilzetzki and Henrik Kleven for VOX: CEPR’s Policy Portal

House prices are strongly correlated with borrowing, but little is known about which one is causing the other.

The column uses UK house price data between 2005 and 2015, and also exploits unusual features of the UK mortgage market, to show that a 10% rise in house prices led to a 2% rise in the amount of equity extracted. This is mostly because higher house prices could be used as collateral.

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Household inequality and the consumption response to shocks

a column by Gene Amromin, Mariacristina De Nardi and Karl Schulze for VOX: CEPR’s Policy Portal

A widening gap between rich and poor has been extensively documented for many countries and economies. This column explores how the wealth gap affects output and consumption changes in response to aggregate shocks. Lower- and higher-wealth households face different borrowing constraints, and have different marginal propensities to consume. Different levels of access to financial liquidity thus play a major role in the overall consumption dynamics during an economic downturn.

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Is the growth in living standards worse now than in the Great Depression?

an article by Larry Elliott published in the Guardian

New data suggests life is getting tougher now for working-age adults than in the lost decade of the 1930s


The Jarrow March, forever a symbol of the grim economic times of the 1930s. Photograph: Keystone/Getty Images

The 1930s are the benchmark when it comes to lost decades. There are recessions and deep recessions, but then there is the Great Depression. In terms of sustained misery, nothing remotely comes close to the 10-year period that followed the Wall Street Crash of 1929.

Yet in one respect – growth in living standards – the performance of the UK since the financial crisis began in 2007 has been worse than it was in the era that included coming off the Gold Standard, the formation of the National Government and the Jarrow March.

Data from the House of Commons library obtained by the Labour MP Liam Byrne illustrates the point. In both cases, there was a similar-sized contraction of the economy lasting two years, but the subsequent recovery in the 1930s was faster than it has been since 2007.

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The distribution of skills among the European adult population and unemployment: A comparative approach

an article by Jorge Calero and Álvaro Choi (University of Barcelona and Barcelona Institute of Economics, Spain) published in European Journal of Education Volume 52 Issue 3 (September 2017)

Abstract

The most painful effect of the Great Recession in European countries has been the surge in unemployment rates during a period that has been characterised by an increase in income inequality and the heterogeneous pattern of this inequality by educational level. Thus, workers with low levels of educational attainment were among the first to lose their jobs.

This article addresses two main research questions:

• first, it estimates the importance of the level of skills and education on the probability of being unemployed, disentangling the extent of the effects of human capital and signalling theories of education; and,
• second, it provides evidence of the impact of inequalities in the previous socioeconomic and cultural background of individuals on the probability of being unemployed.

These two objectives are assessed using data for 24 jurisdictions that participated in the first round of the OECD's Programme for the International Assessment of Adult Competencies (PIAAC). Skill levels play a central role in explaining unemployment in Europe and act as an indirect channel via which a family's sociocultural background has an impact on its labour market status.

Combining the results of alternative models, we identify those European labour markets that are most sensitive to human capital.

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Charitable organisations, the Great Recession and the Age of Austerity: Longitudinal Evidence for England and Wales

an article by David Clifford (University of Southampton, UK) published in Journal of Social Policy Volume 46 Issue 1 (January 2017)

Abstract

There has been extensive concern about the effect of recession and of subsequent public spending austerity on the voluntary sector – but a lack of comprehensive sector-wide data to examine this empirically. We construct a unique longitudinal dataset, which follows through time the population of charitable organisations in England and Wales since 1999, and assess the impact of recession and austerity by placing organisations’ recent annual income within the context of longer-term trends.

The results reveal the scale of the impact on charities’ incomes for the first time: since 2008 median real annual growth in income has been negative for six consecutive years, leading to sizeable cumulative real income decline over the period. Mid-sized charities, and those in more deprived local areas, have been most significantly affected, consistent with concerns about a ‘hollowing out’ of the charitable sector and about the uneven impact of austerity.

However, there has also been considerable variation in the fortunes of charities working in different fields of activity. The analysis in this paper helps to widen our perspective on the implications of the Great Recession and of public spending austerity for social policy.

Full text (PDF)

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Regional resilience across Europe: on urbanisation and the initial impact of the Great Recession

an article by Steven Brakman and Harry Garretsen (University of Groningen, the Netherlands) and Charles van Marrewijk (Xi’an Jiaotong–Liverpool University, China and Utrecht University School of Economics, the Netherlands) published in Cambridge Journal of Regions, Economy and Society Volume 8 Number 2 (July 2015)

Abstract

Using a novel data set for 207 European regions from 22 different countries, we analyse the relevance of urbanisation for the short-term resilience to a major shock.

We take the Great Recession, the economic and financial crisis that started in 2008, as our shock and analyse how the European NUTS 2 regions differ in their short-run resilience in the aftermath to the crisis in terms of unemployment and real GDP per capita.

We find that the degree and nature of regional urbanisation is important for resilience. EU regions with a relatively large share of the population in commuting areas are relatively more resilient. In addition, regions with a large output share in medium-high tech industries were also less affected by the crisis.

JEL codes: R11, R12, R15

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The scarring effect of unemployment from the early '90s to the great recession

a research paper [No. 2015-05 March 2015] by Alberto Tumino for (Institute for Social and Economic Research, University of Essex)

Abstract

This paper addresses two issues of great importance in the current economic climate.

First, it analyses the extent to which unemployment experiences have a scarring effect on British men during the Great Recession.
Second, it provides an insight into the relation between true state dependence and the business cycle by investigating the role of local unemployment in affecting the persistence of unemployment incidence and by analysing the dynamics of unemployment scarring in the last two decades.

Our results support the presence of true state dependence both during the Great Recession and in the other two sub-periods analysed, the early 90s and early 2000s.

Moreover, we find evidence of a negative association between the scarring effect of unemployment and the business cycle. From a policy perspective, our findings imply that public interventions aimed at alleviating unemployment in the short term are also likely to have beneficial effects on longer term unemployment, especially during downturns.

JEL codes: J64, J60, J01, R23

Full text (PDF 44pp)

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The Great Recession was not so great

an article by Jan C. van Ours (Tilburg University, The Netherlands) published in Labour Economics Volume 34 (June 2015)

Abstract

The Great Recession is characterized by a GDP decline that was unprecedented in the past decades. This paper discusses the implications of the Great Recession analyzing labour market data from 20 OECD countries.

Comparing the Great Recession with the 1980s recession it is concluded that there is a high cross-country correlation of the unemployment rates over the two recessions indicating that some labour markets are more vulnerable to fluctuations in economic growth than others. Young workers are the most affected by the Great Recession both in terms of unemployment rates as well as employment rates.

For prime age workers employment rates were also affected but for older workers the Great Recession did not have a large impact. To analyse how economic growth and labour market institutions have affected unemployment two types of models are estimated.

The main conclusion is rather straightforward and has a “one size fits all” character: to reduce unemployment and create jobs economic growth is needed.

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Activation and active labour market policies in OECD countries: stylised facts and evidence on their effectiveness

an article by John P Martin (UCD Geary Institute for Public Policy, University College Dublin, Ireland) published in IZA Journal of Labor Policy 4:4 (2015)

Abstract

Activation policies aimed at getting working-age people off benefits and into work have become a buzzword in labour market policies. Yet they are defined and implemented differently across OECD countries, and their success rates vary too.

The Great Recession has posed a severe stress test for these policies, with some commentators arguing that they are at best “fair weather” policies. This paper sheds light on these issues mainly via the lens of recent OECD research. It presents the stylised facts on how OECD countries have responded to the Great Recession in terms of ramping up their spending on active labour market policies (ALMPs), a key component in any activation strategy.

It then reviews the macroeconomic evidence on the impact of ALMPs on employment and unemployment rates. This is followed by a review of the key lessons from recent OECD country reviews of activation policies. It concludes with a discussion of crucial unanswered questions about activation.

JEL codes: J01, J08, J68

Full text (HTML)

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Why did unemployment respond so differently to the global financial crisis across countries? Insights from Okun’s Law

an article by Sandrine Cazes and Sher Verick (International Labour Office (ILO) and IZA4, Genève, Switzerland) and Fares Al Hussami (Organisation for Economic Co-operation and Development (OECD)) published in IZA Journal of Labor Policy Volume 2 Number 10 (2013)

Abstract

The global financial crisis deeply impacted labour markets around the globe.

In the case of the United States, some commentators have argued that the subsequent rise in unemployment exceeded previous estimates of the elasticity of the unemployment rate with respect to output growth, a statistical relationship known as Okun’s law.

In contrast, others find a stable, long-term estimate of Okun’s coefficient implying that the deviation in unemployment during the crisis resulted from a larger output gap (not a structural shift in the trend). Ultimately, estimates of this relationship will depend on the methodology and data period utilised. Focusing more on short-term fluctuations, changes in unemployment are decomposed to identify the association with other channels of labour market adjustment (hours, productivity and labour force).

Results presented in this paper confirm the cross-country variation in the responsiveness of unemployment in the wake of the Great Recession. In the United States, Canada, Spain and other severely affected economies, estimates of Okun’s coefficient increased sharply, departing from pre-crisis levels.

In other countries, where unemployment has remained subdued, such as Germany and the Netherlands, the coefficient has fallen dramatically over the short-term.

While other factors can explain the heterogeneous impact of the global financial crisis on labour markets in OECD countries, this paper focuses on the contribution of labour market institutions (employment protection legislation) in explaining cross-country differences and shifts in the estimated Okun’s coefficient. In this regard, empirical evidence confirms that the responsiveness in the unemployment rate during the global downturn was lower in countries where workers are afforded greater employment protection such as Germany.

JEL classification: E24, J64, G01

Full text (PDF 18pp) with some very useful charts and graphs

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European labour market policies in (the) crisis

Working Paper 2012.12 by Jochen Clasen, Daniel Clegg and Jon Kvist published by european trade union institute

Introduction

Before the onset of the global economic crisis in 2008, the new millennium had been characterised by the gradual emergence of a new consensus around labour market policy reform in Europe.

While in earlier decades labour market policy debates often opposed supporters and opponents of all forms of public intervention in labour markets, by the 2000s there was increasingly widespread coalescence around a more nuanced ‘recalibration’ agenda, in which the central aim was reworking the precise mix of labour market policies and institutions to best reconcile economic competitiveness and social solidarity and to share the risks and opportunities of modern labour markets more equitably than in the past.

The ‘flexicurity’ debate emphasised protecting individuals through good unemployment benefits and active labour market policies (ALMP) rather than protecting jobs through the strict regulation of employment (Viebrock and Clasen, 2009), while reforms to unemployment benefit systems and ALMPs themselves increasingly sought to extend these measures to those most distant from the labour market (Clasen and Clegg, 2011).

In general, ensuring that labour market policies and institutions combated, rather than reinforced, segmentation in the labour market became the overriding concern of policy debates and reforms in many European countries.

This focus on combating labour market segmentation, rather than expanding or cutting labour market policies per se, developed in a period of relatively buoyant economic and employment performance in many countries, at least by post-oil crisis standards. Since 2008, however, this still fragile consensus around the goals of labour market policy reform has been confronted to an entirely novel set of economic circumstances, as a result of sharp drops in output, spikes in unemployment and, as a second-order effect, soaring public deficits.

Comparing labour market policy responses to the economic crisis in six European countries, this paper explores how the economic and political challenges of the ‘Great Recession’ have impacted on the labour market policy reform agenda in Europe.

Have recalibration agendas in labour market policy survived, or even been reinforced by, the economic crisis? Or has the crisis on the contrary revived reform logics and debates that seemed to have been surpassed earlier in the decade?

Is the economic crisis, in other words, also provoking a crisis for European labour market policy reform?

The first section of the paper briefly outlines a number of analytically distinct patterns of possible labour market policy response to the crisis, and their underlying political and economic logics.

Section 2 then provides sketches of the main labour market policy developments in 6 European countries since the onset of the economic crisis, which are then summarised and compared with reference to the analytical framework in section 3.

A brief conclusion draws out the implications of the analysis for the future of labour market policy in Europe.

Full report (PDF 32pp)

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The Two German Labour Market Miracles: Blueprints for Tackling the Unemployment Crisis?

an article by Holger Bonin (Centre for European Economic Research (ZEW), Mannheim, Germany, University of Kassel, Germany and IZA, Bonn, Germany) published in Comparative Economic Studies Volume 42 issue 4 (December 2012)

Abstract

The article reviews the factors underlying Germany’s exceptional labour market performance since 2005. It attributes labour market turnaround to powerful social reforms strengthening labour supply and effectiveness of public employment services, assisted by cooperative social partners moderating wage growth.

In the great recession, ongoing transition to low-unemployment equilibrium, peculiarities in the export cycle, and private arrangements supporting labour hoarding, rather than discrete policy changes, kept employment at unpredicted levels. While these features scarcely transfer to other circumstances, the policies that evidently lifted Germany to lasting higher employment levels may provide valuable blueprints for countries struggling with current structural unemployment crises.

JEL Classifications: J21, J68, O52

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Comparing Labor Market Performance: Some Stylized Facts and Key Findings

an article by Josef C Brada (Arizona State University, USA) and Marcello Signorelli (University of Perugia, Italy) published in Comparative Economic Studies Volume 54 Issue 2 (June 2012)

Abstract

Comparative evidence based on key labor market performance indicators is discussed for the US, Japan and Europe in a long-run perspective and, especially, showing the impact of the financial crisis and Great Recession.

As for Europe, the huge national and regional level differences are highlighted. In addition, some key findings on labor market performance raised by the empirical studies published in this issue are briefly presented in the wider context of the existing literature and their policy implications are explored.

JEL Classifications: J08; J24; J64; J65

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