## _100810a

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### Introduction — human cost and cross-country dispersion
- Official global unemployment: 210 million people currently out of work worldwide.
- Crisis produced larger dispersion in labor market outcomes for a given output contraction; economies with similar downturns experienced very different changes in unemployment.
- Six economies analyzed for policy role in differing outcomes: Germany, Korea, Mexico, New Zealand, Spain, and Sweden.
  - Spain: worst employment performance among OECD economies during the crisis; primarily domestic shocks.
  - Germany: best employment performance; primarily external shocks.
  - New Zealand: advanced economy hit by multiple external shocks.
  - Mexico: emerging economy hit by multiple external shocks.
  - Korea: fast recovery following external shocks.
  - Sweden: financial sector external shocks.
- Institutional variation (summary):
  - New Zealand: least regulated labor market.
  - Spain and Mexico: most regulated.
  - Germany, Korea, Sweden: intermediate.
  - Mexico: informality exceeds half of employment.
  - Employment protection relatively strict in Spain and Mexico.
  - Dual labor markets notable (Spain, Korea).

### The facts — A. Country-specific shocks (permanent vs. temporary)
- Distinction:
  - Permanent (persistent) shocks: bursting of property bubbles, balance sheet adjustments; most evident in construction employment declines.
  - Temporary shocks: collapse of external demand and external financing constraints; mainly affected manufacturing employment.
- Country summaries:
  - Germany: collapse in world demand for manufactured goods (consumer durables, business capital goods); domestic demand much less affected.
  - Korea: capital outflows and asset-price declines; exports collapsed and quickly spilled over to domestic demand.
  - New Zealand:
    - Collapse of world commodity prices and earlier drought led to substantial drop in agricultural employment.
    - Share of employment in agriculture was about 7 percent before the crisis.
    - Tighter bank credit reduced private consumption and investment demand.
  - Sweden: domestic commercial banks’ exposures forced credit tightening; private consumption and investment demand fell; manufacturing employment reduced.
  - Mexico: U.S. recession hardest on manufacturing; collapse of commodity prices (notably oil); credit tightening; private consumption and investment demand contracted.
  - Spain: domestic and permanent shocks — bursting property-price bubble and ensuing credit tightening caused contraction in private consumption and investment demand.

### The facts — B. Policy responses
- Macro policy stance:
  - Macroeconomic policies were strongly supportive across the board.
  - Extraordinary monetary policy support: policy rates cut dramatically.
  - Fiscal deficits increased in all countries.
  - Fiscal response largest in European economies, partly reflecting automatic stabilizers.
  - Mexico: used strong starting fiscal position to increase infrastructure investment.
  - Korea: smallest fiscal expansion and only country in the sample to maintain a primary surplus.
  - Fiscal data: on a GFS2001 basis (policy lending excluded); Korea data cover only the central government.
- Labor-market policy measures:
  - All six countries introduced measures to support employment, particularly ALMPs and, with Germany in the lead, short-time work (STW) schemes.
  - Types of measures introduced (areas noted in source):
    - Job subsidies, hiring incentives, public work programs (PWP).
    - Reduction in non-wage labor costs.
    - Short-time work schemes.
    - Activation requirements; job search assistance and matching.
    - Job-finding and business start-up incentives; work-experience programs.
    - Training programs; training for existing workers; apprenticeship programs.
  - OECD-sourced summary: broad use of job-search assistance and training programs; Germany prominent for STW schemes.

### Box 3 — Active Labor Market Policies introduced in response to the crisis (country measures)
- Policies to sustain labor demand (selected measures):
  - Germany:
    - reduction in 2009–10 of employer and employees unemployment insurance contribution rates
    - extension of STW allowance to temporary agencies’ workers up to end-2010
    - extension of maximum duration of STW from 6 months to 2 years
    - new subsidized training for STW
  - Korea:
    - temporary expansion of public sector job creation schemes
    - youth internship program for SMEs with wage subsidies
    - easing of STW eligibility; increased employer subsidy for STW
  - Mexico:
    - partial reimbursement of employer social contributions for new employees registered for social security in 2009
    - broadening of temporary PWP to cover all municipalities
    - 50 percent increase in allowed maximum number of days for temporary work
    - temporary STW subsidies
  - New Zealand:
    - permanent reduction in mandatory employer retirement savings contribution and reduction in employee minimum contribution
    - temporary job scheme to support voluntary working hour reductions in some sectors
  - Spain:
    - reduction in employer social contribution for first two years for new employees
    - funding for PWPs; extension of subsidies for hiring part-time workers to those on STW schemes
  - Sweden:
    - deferment of two months of employer 2009 social security contributions and taxes until January 2011
    - permanent increase in hiring subsidy for recruitment of newly-arrived immigrants and long-term unemployed
    - shortened qualification period for hiring subsidy from one year to six months for elderly unemployed
- Policies to improve employment prospects (selected measures):
  - Germany: additional PES staffing; increased funding for training.
  - Korea: increased PES staffing; expanded use of private employment agencies; increased funding for training places.
  - Mexico: increased funding for PES, including job search assistance and matching.
  - New Zealand: redeployment of PES staff; partnerships with employers for youth training and placement; jobs and youth opportunities programs.
  - Spain: increased funding for PES for job search assistance, training, and vocational education.
  - Sweden: increased resources for PES; more job placement schemes; funding for practical skills development and temporary education/training initiatives.
- Short-time work (STW) usage and measured impacts:
  - STW subsidies sometimes combined with on-the-job training.
  - Germany: schemes made more generous in 2008–09, reaching 1.5 million workers at their peak; government provided up to 67 percent of former wages; duration extended to up to 2 years (from 6 months).
  - Korea: government temporarily subsidized up to 70 percent of wages of redundant workers retained by firms; 2009 “Hope Work Program” provided short-term public sector employment for older and long-term unemployed.
  - Mexico: authorities’ data suggest about 250,000 workers benefited from STW schemes in 2009; expanded short-term public sector employment in infrastructure programs benefited up to 700,000 people in 2009 (authorities’ data).
  - Cross-country participation: in 2009, such programs benefited up to 250,000 people in Korea and 700,000 people in Mexico (authorities’ data).

### Box 3 — Key labor market outcomes during the crisis
- Employment and unemployment:
  - Employment dropped the most in Spain; remained almost flat in Germany; recovered to pre-crisis levels in Korea and Mexico.
  - Unemployment rate rose substantially in Spain, declined slightly in Germany, and increased in all other countries (but less than in Spain).
- Hours worked and labor hoarding:
  - Hours worked per person dropped in most countries, especially Germany, Korea and New Zealand, helping avoid excessive job losses.
  - Spain: hours worked per worker increased.
- Wage dynamics:
  - Korea: exceptional downward wage flexibility.
  - Spain: wages rose in 2009 driven by backward and asymmetric wage indexation and industry-level wage bargaining.
  - Real wages broadly constant in other economies, but have started rising more recently.
- Temporary employment:
  - Spain had highest share of temporary employment and largest fall; authorities’ estimates suggest about 80 percent of the jobs lost in Spain during the crisis were temporary contracts.
  - Korea: almost all job losses were for temporary employees according to authorities’ estimates.
- Productivity and unit labor costs:
  - Labor hoarding and collapse in output led to drop in labor productivity.
  - Manufacturing unit labor costs increased in most countries, particularly Sweden followed by Mexico.
  - Unit labor costs have more than recovered in Korea and New Zealand.

### Employment decomposition (2007Q4 to 2009Q4)
- Decomposition identity used: EdtdE/)/( = (d(E rate)/dt)/(E rate) + d(L rate)/dt/(L rate) + (dP/dt )/P  (where E is employment, L is the labor force, and P is the working age population).
- Contributions:
  - All countries but Germany benefited from a positive contribution from growth of the working age population, ranging from 1 percent in Spain and Korea to almost 3 percent in New Zealand and Sweden.
  - Changes in labor force participation were relatively small: participation increased in Spain, Mexico and Germany, but fell in the other countries.
  - The employment rate declined throughout, with the exception of Germany and Korea.
  - Mexico: employment rate fell by 2 percentage points, while employment rose by 1 percent driven by positive contributions from changes in labor force participation and the population.

### Labor force participation and demographics
- Participation broadly flat in most countries; slight increases in Germany and Spain.
- Age composition:
  - Participation increased for older age groups and dropped for the young, broadly offsetting each other.
  - New Zealand: studying accounted for about 72 percent of people between 15 to 24 years old who were not in the labor force.
- Migration and exchange rates:
  - Exchange rate depreciation in real effective terms may have helped absorb shocks in Korea, Mexico, New Zealand and Sweden.
  - In New Zealand, outflows of workers abroad early in the crisis may have reduced the impact on unemployment.
  - Migration did not stabilize Mexico’s labor market during this crisis.

### Long-term unemployment and comparisons with past downturns
- Long-term unemployment typically falls at recession onset then rises if job creation fails to resume.
- Spain appears to have entered the phase with rising long-term unemployment; Sweden and New Zealand show similar but less pronounced cycles.
- Germany: share of long-term unemployment has fallen, although from a high level.
- Comparisons:
  - Output dropped considerably more in Sweden, Germany, Spain and Mexico during the recent crisis, but less in Korea and New Zealand.
  - Drop in employment most pronounced in Spain compared with previous recessions.
  - Unemployment rate surged in Spain relative to output losses compared to past recessions; in other countries unemployment increase was less than or similar to past recessions (Sweden, New Zealand, Mexico) or remained almost flat and well below past experience (Germany, Korea).

### Sectoral employment changes and decomposition (Annex 2 & Annex 5)
- Falling employment shares driven primarily by construction and industrial production (manufacturing and nonmanufacturing); services employment shares often rose.
- Cross-country heterogeneity:
  - Spain: large cross-sector employment movements; construction employment share fell; wholesale and retail services increased substantially.
  - Germany: almost negligible changes.
  - Korea: relatively large employment movements; wholesale and retail services decreased.
  - New Zealand and Sweden: minor sectoral movements; finance employment share increased.
  - Mexico: wholesale and retail services increased substantially (data up to 2008 only).
- Industry evidence (selected elasticities and coefficients from panel regressions, 1985–2009):
  - Panel regression coefficient for "Change in real compensation (t-1)" in pooled sample (1985–2009): -0.17 ***
  - 10 percent increase in real wages leads to drop in employment by 1.5 percent (stated result).
  - Change in real exchange rate interacted with manufacturing (t-1): -0.16 ***, -0.18 **, -0.19 ** (across columns).
  - Change in manufacturing ULC (t-1): -0.12, -0.09, -0.07 (columns).
  - Change in ULC in other sectors (t-1): -0.24 ***, -0.15 **, -0.02 (columns).
  - Employment protection (t-1): 0.006*.
  - Active labor market program index (t-1): 0.02 ***, 0.01, 0.001 (columns).
  - Employment (t-2): -0.01 ***, -0.01 ***, -0.004 ***.

### Modeling and explaining dispersed labor market outcomes (Annex 3 & Annex 4)
- Unobserved components panel model (15 largest economies) estimates output and unemployment gaps; Okun’s law negative correlation especially high in Spain, followed by Mexico, then Korea and Germany.
- Output gap estimates (largest to smaller): Spain has the largest output gap, followed by Mexico, Germany and Korea.
- Unemployment gap estimates:
  - Spain: by far the largest unemployment gap.
  - Mexico: positive unemployment gap but much smaller than Spain’s and falling.
  - Korea: unemployment gap converging towards zero.
  - Germany: negative unemployment gap.
- Historical decompositions:
  - Precrisis positive domestic demand shocks replaced during crisis by negative domestic and foreign demand shocks.
  - Germany: small positive domestic demand shocks dominated by large negative foreign demand shocks.
  - Korea and Mexico: large negative domestic demand shocks amplified by negative foreign demand shocks.
  - Spain: large negative domestic demand shocks dominated small positive foreign demand shocks.
- Empirical model explaining change in unemployment rate (Annex 4, Model 1b emphasized; dependent variable: change in unemployment rate between 2006 and 2009):
  - ALMPs: shifting from intermediate to intensive use reduced the unemployment rate by 1.8 percentage points; coefficient on ALMP (Model 1b): -1.77 ***
  - PMR index coefficient (Model 1b): -7.55 ***
  - Rigidity of employment index (RIG) coefficient (Model 1b): -3.69 ***
  - Interaction PMR x RIG (Model 1b): 1.65 ***
  - Change in the output gap coefficient (Model 1b): -0.35 ***
  - SHTEMP coefficient (Model 1b): -0.44 ***
  - Interaction SHTEMP x RIG (Model 1b): 0.15 ***
  - Model 1b diagnostics: Adjusted R-squared: 0.70; S.E. of regression: 1.51; F-statistic: 10.40 ***; Number of observations: 28.
- Interpretation:
  - PMR, EPL, and labor rigidity have complex effects; PMR-associated reduction in unemployment is subdued in more rigid labor markets.
  - High share of temporary employment combined with rigid labor markets or strict employment protection for regular employees leads to larger unemployment increases.

### Annex 6 — ALMP spending and job creation (DEA and panel findings, precrisis 2004–07)
- Core message: ALMP quality matters more than quantity; ALMPs lead to new jobs only in economies without strict employment protection for regular employees (EPL).
- DEA findings:
  - Inputs: ALMP spending and change in working age population; Outputs: changes in total labor force and number of employees.
  - No link between ALMP spending (share of GDP) and DEA efficiency scores.
  - High DEA efficiency estimated for New Zealand, Mexico, Germany, and Spain; low efficiency in Sweden and Korea.
- Panel regression (fixed effects, 25 OECD economies, Total observations: 99; dependent variable: DEA Efficiency Scores, 2004–07):
  - ln (real GDP per capita): 0.03 (col 1), 0.04 (col 2)
  - Real GDP growth: 0.08*** (both columns)
  - ALMP/GDP: -0.11 (col 1), 0.49 (col 2)
  - EPL: -0.80*** (col 1), -0.29 (col 2)
  - (ALMP/GDP) x EPL: -0.26** (col 2)
  - R-squared: 0.42 (col 1), 0.43 (col 2)
- Interpretation: EPL has a statistically significant negative effect on DEA efficiency; interaction (ALMP/GDP) x EPL negative and significant implies high ALMP spending is associated with lower DEA efficiency in countries with high EPL.

### Annex 7 — Human costs of long-term unemployment and policy options
- Costs of long-term unemployment:
  - U.S. evidence: 15–20 years after a job loss in a recession, earnings loss averages 20 percent.
  - Layoffs associated with higher risk of heart attacks and stress-related illnesses.
  - Increased mortality rate due to unemployment leads to an average loss of life expectancy from 1 to 1.5 years.
  - Parental job loss increases probability a child repeats a grade by nearly 15 percent.
  - Canadian evidence: children whose fathers were displaced have annual earnings about 9 percent lower.
  - U.S. rehire probabilities: for someone unemployed 26 weeks or more, probability of being rehired next month is less than 10 percent; for someone unemployed less than 4 weeks it is over 30 percent.
- Limits of aggregate demand policies:
  - Long-term unemployment responds weakly to increases in real GDP; boosting aggregate demand alone may not sufficiently reduce long-term unemployment.
  - Policy interest rates at or near the zero bound and fiscal constraints in some countries limit scope for aggregate stimulus in 2010–11.
- Short-time work (STW) programs:
  - Aim to retain workers while reducing hours/wages; government subsidizes parts of wage bill.
  - Extensively used in Germany, Italy and Japan; credited with dampening unemployment increases in some countries.
  - Costs/risks: costly for public finances; can create free-riding and delay necessary resource reallocation if shocks are permanent.
  - Country-specific assessments matter; Germany example: labor hoarding incentives and pre-crisis shortages of trained workers interacted with STW use.
- Hiring subsidies:
  - Include direct job/wage subsidies or payroll tax reductions; often targeted at long-term unemployed and youth.
  - Targeting reduces misallocation and can be justified in deep recessions where inefficiencies from subsidies are second-order relative to human costs of unemployment.

### Spain — recent labor market reform (Box 6 — measures and numeric details)
- Reduce duality and dismissal costs for regular employees:
  - Broaden “contract to promote indefinite hiring” to cover almost all new permanent contracts; ensure 33 days severance pay per year of service is the maximum under such contracts (compared with 45 days in regular employment contracts).
  - Facilitate financing of part of severance payments by subsidizing 8 days via payments from a newly established fund, pre-financed by firms.
  - Ease criteria for fair dismissal and limit severance payment to 20 days per year of service.
  - Tighten conditions for temporary contracts: enforce a maximum duration (3 years, with possibility of extending one more year subject to collective bargaining), limit successive renewals, and gradually raise severance payments from 8 to 12 days (by 2015).
- Reduce wage-setting rigidity:
  - Broaden scope to opt-out of collective wage agreements:
    - Firms without compulsory trade union representation (less than 6 employees) can opt out.
    - Large firms can opt out if agreed between employers and employees.
- Other measures:
  - Increase firm-level flexibility to encourage short-time working plans over lay-offs.
  - Incentives for use of “training contracts.”
  - Open labor intermediation more broadly to private agencies.
- Note: reforms have not changed backward and asymmetric wage indexation; this remains under discussion.

### Key conclusions and policy implications
- Policies to support employment are justified during severe downturns but must be tailored to:
  - Expected duration of the shock (temporary vs. permanent).
  - Institutions in place.
- Effectiveness examples:
  - Short-time work programs effective after temporary shocks, less effective after permanent shocks where sectoral reallocation is required, and less effective with severe wage rigidities or dual labor markets.
- Policies that can help avoid long-term unemployment and skill erosion:
  - Well targeted short-time work, hiring subsidies, training programs, and incentives to return to school.
- Recommended reforms:
  - Reduce employment protection gaps in dual labor markets to smooth adjustments and avoid over-reliance on temporary contracts.
  - Design wage-setting mechanisms that combine centralized coordination for economy-wide shocks and firm-level bargaining for firm-specific shocks.
  - Phase out crisis-driven labor market policies in favor of broader structural reforms in the medium term to avoid distortions; structural reforms and improved business environment support sustainable output and employment growth.

*Source: IMF staff report chapter "Output Growth Decompositions: 2000–10" (content unit _100810a).*

### 1. Output Growth Decompositions: 2000–10 ............................................................................8

### 1. Output Growth Decompositions: 2000–10

### Introduction: human cost and cross-country dispersion
- Official global unemployment: 210 million people currently out of work worldwide.
- The crisis produced larger dispersion in labor market outcomes for a given output contraction than in past crises:
  - Labor market responses deviated far more from the estimated negative relationship between the severity of the recession and the increase in unemployment.
  - Economies with similar downturns experienced very different changes in unemployment, implying collapse of growth cannot fully explain differences in labor market performance.
- Six economies analyzed for policy role in differing labor market outcomes: Germany, Korea, Mexico, New Zealand, Spain, and Sweden.
  - Spain had the worst employment performance among OECD economies during the crisis; Germany had the best.
  - Spain: primarily domestic shocks. Germany: primarily external shocks.
  - Other cases:
    - New Zealand: advanced economy hit by multiple external shocks.
    - Mexico: emerging economy hit by multiple external shocks.
    - Korea: fast recovery following external shocks.
    - Sweden: financial sector external shocks.
- Institutional variation across sample (Annex 1 summary):
  - New Zealand: least regulated labor market.
  - Spain and Mexico: most regulated.
  - Germany, Korea, Sweden: intermediate.
  - Employment protection: relatively strict in Spain and Mexico.
  - Dual labor markets noted where temporary employment protection is substantially lower than for regular employment (Spain, Korea).
  - Mexico: informality exceeds half of employment.

### The facts — A. Country-specific shocks (permanent vs. temporary)
- Crisis transmission varied by country; external demand declined broadly but asset-price and trade collapses reduced domestic and external demand to varying degrees.
- Distinction drawn between permanent (persistent) shocks and temporary shocks:
  - Permanent shocks: bursting of property bubbles, balance sheet adjustments — most evident in construction employment declines.
  - Temporary shocks: collapse of external demand and external financing constraints — mainly affected manufacturing employment.
- Country experiences summarized:
  - Germany, Korea, New Zealand, Sweden: hit by temporary external shocks, but domestic demand effects differed by country.
    - Germany: collapse in world demand for manufactured goods (consumer durables, business capital goods) caused export demand contraction; domestic demand much less affected.
    - Korea: capital outflows and asset-price declines, exports collapsed and quickly spilled over to domestic demand.
    - New Zealand: collapse of world commodity prices (exacerbating earlier drought) led to substantial drop in agricultural employment; tighter bank credit reduced private consumption and investment demand.
      - New Zealand’s share of employment in agriculture was about 7 percent before the crisis.
    - Sweden: concentrated exposures of domestic commercial banks to troubled emerging economies forced credit tightening, reducing private consumption and investment demand; collapse in world demand for manufactured goods contracted export demand and reduced manufacturing employment.
  - Mexico: hit by multiple external shocks (U.S. recession hardest on manufacturing), collapse of commodity prices (notably oil), and credit tightening by distressed foreign-owned banks; external demand dropped substantially, and private consumption and investment demand also contracted.
  - Spain: primarily hit by domestic and permanent shocks — bursting property-price bubble and ensuing credit tightening caused contraction in private consumption and investment demand.

### The facts — B. Policy responses
- Macro policy stance:
  - Macroeconomic policies were strongly supportive across the board during the crisis.
  - Extraordinary monetary policy support: policy rates cut dramatically (by similar magnitudes, albeit from different starting points).
  - Fiscal deficits increased in all countries.
  - The fiscal response was largest in the European economies, partly reflecting automatic stabilizers.
  - Mexico: used strong starting fiscal position to increase spending in infrastructure investment to stimulate the economy.
  - Korea: had the smallest fiscal expansion and was the only country in the sample to maintain a primary surplus.
  - Fiscal data note: fiscal data in the text chart are on a GFS2001 basis (policy lending excluded in this basis); data for Korea cover only the central government.
- Labor-market policy measures:
  - All six countries introduced measures to support employment, particularly active labor market policies (ALMP) and, with Germany in the lead, short-time work schemes.
  - Types of measures taken (federal government initiatives; check marks in source indicate discretionary action in the area, with no indication of intensity):
    - Job subsidies, hiring incentives, or public work programs (PWP).
    - Reduction in non-wage labor costs.
    - Short-time work schemes.
    - Activation requirements.
    - Job search assistance and matching.
    - Job-finding and business start-up incentives.
    - Work-experience programs.
    - Training programs.
    - Training for existing workers.
    - Apprenticeship programs.
  - OECD-sourced summary indicates broad use of job-search assistance and training programs across many sample countries; Germany prominent for short-time work schemes; diverse combinations of ALMPs used across the sample.

### Substantive findings and interpretive points
- Different shock types (permanent vs. temporary; domestic vs. external) help explain divergent labor market outcomes across countries.
- Institutional features and pre-crisis labor market rigidities matter for labor market performance during the crisis:
  - High employment protection and redundancy costs in Germany, Spain, and Mexico; high firing costs in Korea.
  - Dual labor markets form where temporary contracts have much lower protection than regular contracts (Spain, Korea).
  - Wage-setting rigidity highest in Spain; tax wedges on labor income high in Germany, followed by Spain and Sweden.
  - Wage bargaining centralization varies: Germany and Sweden more centralized; New Zealand, Korea, and Mexico more decentralized; Spain intermediate.
  - Minimum wage: relatively high in New Zealand, followed by Spain; Germany has no statutory minimum wage.
  - Employee compensation most linked to productivity in New Zealand and Korea; link improved in Germany but not in Mexico and Spain (Spain has wage indexation).
- Macroeconomic stabilization and targeted labor-market measures can mitigate labor-market costs, but country-specific institutions and the nature of shocks shape outcomes.

*Source: IMF staff report chapter "Output Growth Decompositions: 2000–10" (excerpted content provided).*

### Box 3. Active Labor Market Policies Introduced in Response to the Recent Crisis

### Box 3. Active Labor Market Policies Introduced in Response to the Recent Crisis

### Policies to sustain labor demand (country measures)
- Germany:
  - reduction in 2009–10 of employer and employees unemployment insurance contribution rates
  - easing of the eligibility for STW schemes by simplifying procedures
  - extension of allowance for STW to temporary agencies’ workers up to end-2010
  - extension of the maximum duration of STW from 6 months to 2 years
  - new subsidized training for STW
- Korea:
  - temporary expansion of public sector job creation schemes
  - youth internship program for SMEs with wage subsidies for hiring interns at the end of the internship
  - easing of the eligibility for STW schemes by reducing the proportion of workers to be reassigned and the minimum training hours to be eligible for STW subsidy
  - increased employer subsidy for STW
- Mexico:
  - partial reimbursement of employer social contributions for new employees registered for social security in 2009
  - broadening of the temporary PWP to cover all municipalities
  - a 50 percent increase in the allowed maximum number of days for temporary work
  - temporary introduction of STW subsidies to support working hours’ reductions negotiated by social partners
- New Zealand:
  - permanent reduction in mandatory employer retirement savings contribution and reduction in employee minimum contribution
  - introduction of a temporary job scheme to support voluntary working hour reductions negotiated between social partners in some sectors
- Spain:
  - reduction in employer social contribution for the first two years for new employees
  - reduction of social contributions for youth and the disabled who start up businesses
  - funding for PWPs
  - extension of subsidies for hiring part-time workers to those on STW schemes
- Sweden:
  - deferment of two months of employer 2009 social security contributions and taxes until January 2011
  - permanent increase in hiring subsidy for recruitment of newly-arrived immigrants and those who have been unemployed or sick for more than a year
  - shortened qualification period for hiring subsidy from one year to six months for elderly unemployed

### Policies to improve employment prospects (country measures)
- Germany:
  - additional public employment services (PES) staffing to improve job search assistance
  - increased funding for training, including for the unemployed
- Korea:
  - increase in PES staffing and expanded use of private employment agencies
  - increased funding for expansion of training places for the unemployed
- Mexico:
  - increased funding for PES, including job search assistance and job matching
- New Zealand:
  - redeployment of PES staff to increase job search assistance
  - partnerships with employers to provide training and job placement for low-skilled youth
  - jobs and youth opportunities programs (wage subsidies and training for youth at risk of long-term unemployment)
- Spain:
  - increased funding for PES for job search assistance, training, and vocational education
- Sweden:
  - increased resources for PES to expand job search assistance
  - increase in the number of job placement schemes for the unemployed
  - funding for practical skills development for the unemployed with previous experience and increased financial aid for those who start training
  - temporary regular education and training initiatives (adult vocational training/adult education, vocational colleges and universities and colleges)

### Short-time work (STW) schemes: usage and measured impacts
- Overview:
  - STW schemes operated through subsidies to firms for parts of the wage bill, sometimes combined with support for on-the-job training (e.g., Sweden).
  - Participation varied substantially across countries.
- Germany:
  - existing schemes made more generous in 2008–09, reaching 1.5 million workers at their peak
  - government provided up to 67 percent of former wages to employees who agreed with employers to cut working hours, partially or completely, for up to 2 years (extended from 6 months initially)
- Korea:
  - government temporarily subsidized up to 70 percent of the wages of redundant workers retained by firms
  - a 2009 program (“Hope Work Program”) provided short-term public sector employment for older and long-term unemployed
- Mexico:
  - authorities’ data suggest that about 250,000 workers benefited from STW schemes in 2009
  - expanded short-term public sector employment in infrastructure programs; in 2009 such programs benefited up to 700,000 people (authorities’ data)
- Cross-country participation:
  - elsewhere participation in STW schemes was more limited
  - in 2009, such programs benefited up to 250,000 people in Korea and 700,000 people in Mexico (authorities’ data)

### Key labor market outcomes during the crisis
- Employment and unemployment:
  - employment dropped the most in Spain; remained almost flat in Germany; recovered to pre-crisis levels in Korea and Mexico
  - the unemployment rate rose substantially in Spain, declined slightly in Germany, and increased in all other countries (but less than in Spain)
- Hours worked and labor hoarding:
  - hours worked per person dropped in most countries, helping avoid excessive job losses
  - the drop was more pronounced in Germany, Korea and New Zealand
  - Spain was the only country where hours worked per worker increased
- Wage dynamics:
  - Korea showed exceptional downward wage flexibility
  - wages rose in Spain in 2009 driven by backward and asymmetric wage indexation and rigidities from an intermediate (industry-level) wage bargaining system
  - real wages were kept broadly constant in the other economies, but have started rising more recently
- Temporary employment:
  - countries with large shares of temporary employment absorbed shocks mainly through temporary contracts
  - Spain had the highest share of temporary employment and the largest fall; authorities’ estimates suggest about 80 percent of the jobs lost in Spain during the crisis were temporary contracts
  - Korea’s precrisis share of temporary employment and its adjustment were smaller, but authorities’ estimates suggest almost all job losses were for temporary employees
- Productivity and unit labor costs:
  - labor hoarding and the collapse in output led to a drop in labor productivity
  - manufacturing unit labor costs increased in most countries, particularly in Sweden followed by Mexico
  - unit labor costs have more than recovered in Korea and New Zealand

### Employment decomposition (Box 4 summary; period 2007Q4 to 2009Q4)
- Decomposition identity used:
  - EdtdE/)/( = (d(E rate)/dt)/(E rate) + d(L rate)/dt/(L rate) + (dP/dt )/P  (where E is employment, L is the labor force, and P is the working age population)
- Contributions to employment changes:
  - All countries but Germany benefited from a positive contribution from growth of the working age population, ranging from 1 percent in Spain and Korea to almost 3 percent in New Zealand and Sweden
  - Changes in labor force participation were relatively small: participation increased in Spain, Mexico and Germany, but fell in the other countries
  - The employment rate declined throughout, with the exception of Germany and Korea
  - Mexico: employment rate fell by 2 percentage points, while employment rose by 1 percent driven by positive contributions from changes in labor force participation and the population

### Labor force participation and demographic composition
- Overall:
  - labor force participation has been broadly flat in most countries, with slight increases in Germany and Spain
- Age composition:
  - participation increased for older age groups and dropped for the young, broadly offsetting each other
  - older people may have postponed retirement or rejoined the labor market to take advantage of programs to reduce long-term unemployment
  - younger people may have been discouraged from entering the labor market or returned to education
  - country exceptions: Germany saw increased participation for all age groups; Mexico saw participation decline for young and old but increase for other groups
- Additional notes:
  - in New Zealand, studying accounted for about 72 percent of people between 15 to 24 years old who were not in the labor force

### Role of exchange rate flexibility and migration
- Exchange rate depreciation in real effective terms may have helped absorb shocks in Korea, Mexico, New Zealand and Sweden
- In New Zealand, outflows of workers abroad early in the crisis may have reduced the impact on unemployment
- Migration did not stabilize Mexico’s labor market during this crisis, unlike in past downturns

### Long-term unemployment and comparisons with past downturns
- Long-term unemployment:
  - typically falls at the beginning of a recession as newly unemployed increase the share of short-term unemployment, but later rises if job creation fails to resume
  - Spain appears to have entered the second phase with rising long-term unemployment; Sweden and New Zealand show a similar but less pronounced cycle
  - Germany: share of long-term unemployment has fallen, although from a high level
- Comparisons with earlier episodes:
  - output dropped considerably more in Sweden, Germany, Spain and Mexico during the recent crisis, but less in Korea and New Zealand
  - the drop in employment was most pronounced in Spain compared with previous recessions; Korea experienced much larger job losses during the East Asian financial crisis
  - the unemployment rate surged in Spain relative to output losses compared to past recessions; in other countries the unemployment increase was less than or similar to past recessions (Sweden, New Zealand, Mexico) or remained almost flat and well below past experience (Germany, Korea)
  - labor force participation has so far been stronger than in past cycles in most countries, reflecting higher participation by older age groups

*Source: Box 3 and related text in the supplied IMF content unit.*

### 19.      The changes in the sectoral distribution of employment are similar to those

### _100810a - 19.      The changes in the sectoral distribution of employment are similar to those

### Sectoral employment changes during the crisis
- Falling employment shares were driven primarily by construction and industrial production (both manufacturing and nonmanufacturing).
- In most cases declines in construction and industrial employment were compensated by an increase in the employment share of services.
- Cross-country heterogeneity:
  - Spain: large cross-sector employment movements; substantial unemployment increase.
  - Germany: almost negligible changes; unemployment declined.
- Figure and model evidence: unobserved components model estimates and WEO estimates show broad output gap declines and rising unemployment gaps, with the ratio of the unemployment gap to the output gap varying substantially (from close to 1 in Spain to slightly negative in Germany). (See Figure 4 and Annex 3.)

### Modeling and explaining dispersed labor market outcomes
- Main explanatory factors:
  - Choice between employment shedding and hours reduction as labor market adjustment to negative aggregate demand shocks.
  - Institutions, shock composition, and expected duration of the aggregate demand shock.
- Empirical/model findings:
  - Estimates from an unobserved components model confirm substantial cross-country variation in labor market performance (Figure 4 and Annex 3).
  - Consistent with WEO estimates, output gaps dropped across the board—particularly in Mexico and Spain—while unemployment gaps increased.
  - The ratio of the unemployment gap to the output gap varies substantially across countries.
  - Econometric model estimates suggest unemployment broadly behaved in line with expectations given shock size, institutions, and labor market policies (Annex 4).
  - One-digit industry data confirm links between employment growth and shock-absorbing mechanisms activated during the crisis—adjustment in labor costs, active labor market policies, and changes in the exchange rate (Annex 5).
- Role of sectoral shocks:
  - Country-level econometric decompositions could not fully explain Spain’s large unemployment increase and Germany’s unemployment drop despite similar policy introductions.
  - Industry-level analysis indicates sectoral and permanent shocks in Spain—particularly large drop in construction where temporary employment share is relatively high—explain much of Spain’s outcome.
  - Germany exhibited labor hoarding in response to external but temporary shocks.

### Country-specific interactions of shocks, institutions, and policies (Box 5 — key points)
- General principle: the perceived duration of country-specific shocks was a key determinant of outcomes.
- Spain:
  - Shock: domestic, sectoral, persistent.
  - Labor market: segmented and rigid.
  - Adjustment primarily through reductions in temporary employment.
  - Labor market policies were ineffective; strict employment protection for regular employees, backward and asymmetric wage indexation, and industry-level wage bargaining limited other adjustment channels.
- Germany:
  - Shock: severe external collapse in world demand for manufactured goods, perceived temporary.
  - Policy focus: avoiding job losses via subsidized reduction in working hours (short-time work) and job retention.
  - Institutional support: centralized wage bargaining and relatively inflexible working arrangements.
  - Unique outcomes: construction employment rose during the crisis; unemployment declined.
- New Zealand:
  - Shock: external, perceived temporary, but large domestic demand effects.
  - Institutional features: flexible labor market, decentralized wage determination.
  - Adjustment via wage restraint, declines in hours worked, some unemployment increase, exchange rate flexibility.
  - ALMPs focused on information/matching; reductions in hours achieved largely through direct negotiations and firm-level agreements without extensive government subsidies.
- Korea:
  - Shock: external and temporary.
  - Labor markets segmented but not very rigid; wage determination relatively decentralized.
  - Adjustment via declines in real wages, hours worked, temporary employment cuts.
  - Reduction in hours through government programs and direct negotiations; a program to reduce long-term unemployment via short-term government job opportunities proved effective.
  - Employment initially fell in most sectors except nonmanufacturing industry and public sector employment and has fully recovered more recently.
- Sweden:
  - Shock: primarily external through financial and real channels; credit tightening and collapse in world demand for manufactured goods.
  - Increased labor market flexibility from prior reforms muted impact; labor hoarding and exchange rate flexibility helped absorb shocks.
- Mexico:
  - Shock: multiple external shocks linked to the U.S.; collapse in commodity prices and credit tightening magnified impact.
  - Adjustment used multiple channels; existing rigidities pushed part of adjustment onto the informal sector.
  - ALMPs were strengthened but less so than in some advanced economies; currency weakening may have acted as shock absorber.

### Policy effectiveness and institutional dependence
- Countercyclical labor market institutions/policies generally offset supply-shock transmission to the labor market in most countries except Spain (Annex 3).
- Spain: domestic labor demand shocks amplified cyclical fluctuations, indicating procyclical labor market institutions (high prevalence of temporary contracts, wage rigidities) despite strengthening ALMPs.
- ALMPs are most effective in creating new jobs in economies without strict employment protection for regular contracts (Annex 6).
- Where shocks were perceived permanent, ALMPs helping unemployed find new jobs were effective; where shocks were perceived temporary, employment retention schemes and reductions in working hours proved most effective.
- State intervention facilitated reductions in working hours in some countries; in others, flexible labor markets relied on employer-employee agreements.

### Spain: recent labor market reform (Box 6 — specific measures and numeric details)
- Objective: reduce labor market duality and wage-setting rigidity.
- Measures to reduce duality and dismissal costs for regular employees:
  - Broaden the “contract to promote indefinite hiring” to cover almost all new permanent contracts and ensure 33 days severance pay per year of service is the maximum under such contracts—compared with 45 days in regular employment contracts.
  - Facilitate financing of part of severance payments by subsidizing 8 days via payments from a newly established fund, to be pre-financed by firms.
  - Ease criteria for fair dismissal and limit severance payment to 20 days per year of service.
  - Tighten conditions for temporary contracts by enforcing a maximum duration (3 years, with the possibility of extending it one more year subject to collective bargaining), limiting successive renewals, and gradually raising severance payments from 8 to 12 days (by 2015).
- Measures to reduce wage-setting rigidity:
  - Broaden scope to opt-out of collective wage agreements:
    - Firms without compulsory trade union representation (less than 6 employees) can opt out.
    - Large firms can opt out if agreed between employers and employees.
- Other reform aspects:
  - Increase firm-level flexibility to encourage short-time working plans over lay-offs.
  - Incentives for the use of “training contracts.”
  - Open labor intermediation more broadly to private agencies.
- Note: reforms have not changed backward and asymmetric wage indexation; this remains under discussion among social partners.

### Key conclusions and policy implications (IV)
- Policies to support employment are justified during severe downturns but must be tailored to:
  - Expected duration of the shock (temporary vs. permanent).
  - Institutions in place.
- Effectiveness examples:
  - Short-time work programs effective after temporary shocks, less effective after permanent shocks where sectoral reallocation is required, and less effective in presence of severe wage rigidities or dual labor markets.
- Policies can help avoid increases in long-term unemployment and drops in labor force participation, preventing skill erosion:
  - Well targeted policies: short-time work, hiring subsidies, training programs, incentives to return to school.
  - These can help bring back discouraged groups and increase labor force participation by older groups.
- Reforms recommended:
  - Reduce employment protection gaps in dual labor markets to smooth adjustments and avoid over-reliance on temporary contracts.
  - Wage-setting mechanisms should combine centralized coordination for economy-wide shocks and firm-level bargaining for firm-specific shocks.
  - Crisis-driven labor market policies should be phased out in favor of broader structural reforms in the medium term to avoid distortions; structural reforms and improved business environment support sustainable output and employment growth.

*Source: IMF staff analysis and case study material in the provided content unit.*

### Annex 1. Heat Maps of Institutions: Labor Markets and other Structural Areas

### Annex 1. Heat Maps of Institutions: Labor Markets and other Structural Areas

### Methodology and sample
- Aggregates structural indicators from OECD Going for Growth; World Economic Forum Global Competitiveness Report (WEF); and Economic Freedom of the World Report of the Fraser Institute (IEF).
- Maps institutional characteristics in a sample of 26 selected advanced economies; Mexico is assessed out of sample.
- Flagging rules: relative country rating for each indicator is low for a value below the sample average, medium (1 flag) for a value within 1 standard deviation above the sample average, and high (2 flags) for a value 1 standard deviation above the sample average. Flags are summed across indicators for each structural area and each country; country rating in each area is based on thresholds using the above criteria. Overall ratings are determined by summing the flags across structural areas using the same aggregation methodology.

### Key country-level structural flags (selection reported)
- Germany
  - Flagged as high for employment rigidities, and medium for wage rigidities.
  - Structural flags also raised for human capital, business and services regulation and credit market rigidities.
- Korea
  - Flagged as medium for employment rigidities and other labor market characteristics.
  - Flagged as medium for rigidities in all other structural areas except human capital and innovation.
- Mexico (assessed out of sample)
  - Flagged as high for employment rigidities and other labor market characteristics.
  - Flagged as high for rigidities in most other structural areas (medium for openness to trade and credit rigidities).
- New Zealand
  - Not flagged for employment and wage rigidities; medium for other labor market characteristics.
  - Flagged as high for bottlenecks in infrastructure, and medium in openness to trade and FDI.
- Spain
  - Flagged as high for employment and wage rigidities and other labor market characteristics.
  - Flagged as high for human capital and innovation bottlenecks and medium in other structural areas (such as business regulation).
  - Note: These results do not reflect recent labor market reforms in Spain.
- Sweden
  - Flagged as medium for employment and wage rigidities, and for bottlenecks in institutions and contracts, and for credit market rigidities.

### Heat-map contents and legend
- Heat maps provide indicators of structural labor market inefficiencies and broader structural areas (Institutions and contracts; Infrastructure; Human capital; Labor market rigidity; Business and services regulation; Openness to trade and FDI; Credit market rigidity; Innovation).
- Legend: H, M, L denote high, medium and low inefficiencies, respectively, in relative terms.
- Sources: OECD, World Economic Forum, Fraser Institute and Fund staff calculations.

---

### Annex 2. Shifts in Sectoral Allocation of Employment during Crises

### Sample and main finding
- Sample: 32 crisis episodes in 21 advanced economies, during 1985–2009.
- Main result: Growth crises in advanced economies are accompanied by only modest changes in the allocation of employment shares; the recent global crisis produced sectoral employment changes similar on average to past crises (1985–2009), with country-specific exceptions.

### Notable country exceptions (recent crisis up to end-2009)
- Spain
  - Experienced considerably larger employment movements than other advanced economies and compared with its own past crises.
  - Employment share fell in construction.
  - Manufacturing and nonmanufacturing industry employment shares remained almost flat (unique relative outcome).
  - Wholesale and retail services increased employment share substantially.
- Germany
  - Almost negligible employment movements.
- Korea
  - Relatively large employment movements, even compared with its own past crises.
  - Wholesale and retail services decreased employment share.
- New Zealand
  - Sectoral employment movements have been minor.
  - Employment share in construction fell.
  - Finance employment share increased.
- Sweden
  - Sectoral employment movements have been minor.
  - Finance employment share increased.
- Mexico
  - Wholesale and retail services increased employment share substantially.
  - Note: Data for Mexico are only available up to 2008; the chart is included only for information and is not discussed in the text.

### Sectoral patterns during the recent crisis
- Employment share fell in construction and industry (both manufacturing and nonmanufacturing) in most countries.
- Employment share in other services increased in all countries.
- Finance employment share increased in New Zealand, Spain, and Sweden.
- Wholesale and retail services rose markedly in Mexico and Spain, but fell in Korea.

---

### Annex 3. Output and Unemployment Dynamics during the Recent Crisis: A Panel Unobserved Components Analysis

### Model, sample and objectives
- Analysis based on a structural macroeconometric model of the world economy, disaggregated into its fifteen largest economies.
- Focused discussion on results for Germany, Korea, Mexico and Spain.
- Objectives: estimate output and unemployment gaps; use historical decompositions to identify structural determinants of output growth and unemployment.

### Definitions and empirical regularities
- Output gap: measure of cyclical output market imbalances; positive values indicate excess demand pressure, negative excess supply pressure.
- Unemployment gap: measure of cyclical labor market imbalances; positive values indicate excess supply pressure, negative excess demand pressure.
- Output gap and unemployment gap tend to be negatively correlated (Okun’s law). During the 2000s this negative correlation was particularly high in Spain, followed by Mexico, then Korea and Germany.
- During the last recession (period when the output gap fell from peak to trough), correlations increased in all countries, particularly in Korea and Mexico—indicating common shocks driving simultaneous excess supply pressure in output and labor markets.

### Estimated imbalance levels and trajectories
- Output gap estimates (largest to smaller): Spain has the largest output gap, followed by Mexico, Germany and Korea.
  - Spain’s output gap is largest and has been large relative to peers.
  - Korea and Mexico: output gaps have been shrinking rapidly.
- Unemployment gap estimates:
  - Spain: by far the largest unemployment gap.
  - Mexico: positive unemployment gap, much smaller than Spain’s and has been falling.
  - Korea: unemployment gap converging towards zero.
  - Germany: stands out as the only country with a negative unemployment gap.
- The dispersion of unemployment gap estimates is high relative to output gap dispersion.

### Historical decompositions — drivers of output and unemployment dynamics
- General result: Precrisis positive domestic demand shocks contributed to excess output demand pressure; during the crisis these were replaced by country-specific combinations of negative domestic and foreign demand shocks creating excess output supply pressure.
- Country-specific decomposition highlights:
  - Germany: small positive domestic demand shocks were dominated by large negative foreign demand shocks.
  - Korea and Mexico: large negative domestic demand shocks amplified by negative foreign demand shocks.
  - Spain: large negative domestic demand shocks dominated small positive foreign demand shocks.
- Exceptional monetary policy loosening in all countries mitigated the rapid accumulation of excess output supply pressure.
- For the unemployment rate, contributions from domestic and foreign output demand shocks generally mirrored those to output growth.
  - Precrisis: positive domestic output demand shocks contributed to excess labor demand pressure in all economies; generally mitigated by negative labor demand shocks, except Spain where positive labor demand shocks amplified it.
  - During the crisis: negative domestic and foreign output demand shocks rapidly eliminated excess labor demand pressure and generally created excess labor supply pressure.
  - Offsetting contributions from labor demand shocks indicate that the transmission from output market excess supply to labor market excess supply was strongly mitigated by countercyclical labor market policies or institutions in most countries.
  - Spain is a notable exception where domestic labor demand shocks have tended to amplify cyclical fluctuations, consistent with procyclical labor market institutions (for example, prevalence of temporary employment contracts and wage rigidities).

### Notes on interpretation
- Historical decompositions attribute business cycle dynamics around relatively stable potential output growth rates primarily to economy-specific combinations of domestic and foreign output demand shocks (e.g., open economies like Germany driven by foreign demand shocks; relatively closed economies like Spain driven by domestic demand shocks).
- Unemployment decompositions attribute fluctuations to combinations of domestic and foreign output demand shocks together with domestic labor demand shocks; labor supply and demand shocks capture dynamics not derived from output market dynamics and may reflect labor market policies or institutions.

*Source: _100810a - Annex 1. Heat Maps of Institutions: Labor Markets and other Structural Areas*

### Annex 4. Explaining Unemployment Increases during the Crisis: The Role of Policies

### Annex 4. Explaining Unemployment Increases during the Crisis: The Role of Policies

### Overview
- Empirical model explains cross-country variation in the change in the unemployment rate among OECD members during the recent crisis, controlling for output shock and institutions.
- Sample includes: Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States.
- Dependent variable: change in unemployment rate between 2006 and 2009.
- Policy variable of interest: Active labor market policies (ALMP) dummy defined from OECD reporting on increased spending across up to 10 areas (dummy = 1 for increased spending in 2 to 4 areas; 2 for 4 to 7 areas; 3 for more than 7 areas). Assumptions for Denmark and Switzerland noted in the source.

### Main empirical findings (Model 1b emphasized)
- ALMPs in response to the crisis:
  - Shifting from an intermediate use of ALMPs to an intensive use reduced the unemployment rate by 1.8 percentage points.
  - Coefficient on ALMP (Model 1b): -1.77 ***
- Product market regulation (PMR) and labor institutions:
  - PMR index coefficient (Model 1b): -7.55 ***
  - Rigidity of employment index (RIG) coefficient (Model 1b): -3.69 ***
  - Employment protection legislation index (EPL) included in other specifications (Model 2a/2b): 3.54 * and -4.95 *** respectively (see table for specification differences).
  - Interaction effects:
    - PMR interacted with RIG (Model 1b): 1.65 *** (positive interaction implies PMR-related reduction in unemployment is subdued in more rigid labor markets)
    - PMR interacted with EPL (Model 2b): 2.19 ** (positive)
    - SHTEMP (share of temporary employment) interacted with RIG (Model 1b): 0.15 *** (positive)
    - SHTEMP interacted with EPL (Model 2b): 0.25 *** (positive)
- Output gap:
  - Change in the output gap coefficient (Model 1b): -0.35 *** (consistent with Okun’s Law: a drop in the output gap correlated with higher unemployment)
- Share of temporary employment:
  - SHTEMP coefficient (Model 1b): -0.44 ***
  - Standalone SHTEMP in other specifications: 0.14 * (Model 1a), 0.10 (Model 2a), -0.48 *** (Model 2b) — specification-dependent signs and significance.
- Model fit and diagnostics (selected):
  - Adjusted R-squared (Model 1b): 0.70
  - S.E. of regression (Model 1b): 1.51
  - F-statistic (Model 1b): 10.40 ***
  - Number of observations: 28 (reported as 28 28 28 28 across models)
- Prediction performance:
  - For about half the countries in the sample, the prediction error of the change in unemployment is within 1 percentage point (predictions based on Model 1b).
- Interpretation:
  - PMR, EPL, and labor rigidity appear to have complex effects—PMR tends to be associated with lower unemployment (possibly by delaying structural adjustment), but this effect is moderated (reduced) when EPL or RIG is higher.
  - Countries with a high share of temporary employment combined with rigid labor markets or strict employment protection for regular employees experienced larger increases in unemployment.

*Key coefficients and significance markers reproduced exactly as in the source table.*

---

### Annex 5 — Determinants of Employment Changes: Industry Evidence (1985–2009)
- Data: annual, one-digit industries across OECD economies; results are suggestive since full crisis effects may not yet be observed.
- Main findings:
  - Real compensation and employment:
    - A 10 percent increase in real wages leads to a drop in employment by 1.5 percent.
    - Panel regression coefficient for "Change in real compensation (t-1)" in pooled sample (1985–2009): -0.17 ***
    - In 2000–09 specifications: -0.16 ** and -0.15 ** (two reported columns)
  - Real exchange rate and manufacturing:
    - A 10 percent real exchange appreciation (and rise in unit labor costs) leads to a decline in manufacturing employment by about 1 to 2 percent.
    - Change in the real exchange rate interacted with manufacturing (t-1): -0.16 ***, -0.18 **, -0.19 ** (across columns)
  - Unit labor costs (ULC):
    - Change in manufacturing ULC (t-1): -0.12, -0.09, -0.07 (columns)
    - Change in ULC in other sectors (t-1): -0.24 ***, -0.15 **, -0.02
  - Public sector employment:
    - Change in public sector employment interacted with other services: 0.12, 0.16, 0.22 (columns)
    - In Korea: Change in public sector employment interacted with other services in Korea: 0.75 ***, 0.75 ***, 0.75 ***
  - Employment protection and ALMPs:
    - Employment protection (t-1): 0.006* (positive coefficient reported)
    - Active labor market program index (t-1): 0.02 ***, 0.01, 0.001 (columns)
  - Other:
    - Change in hours worked per person (t-1): -0.07, 0.2, 0.1 (columns)
    - Share of temporary employment (t-1): -0.02, 0.1, 0.01 (columns)
    - Employment (t-2): -0.01 ***, -0.01 ***, -0.004 ***
- Outliers in 2009 by industry (actual, fitted, residual shown for select countries):
  - Germany (Agriculture actual 0.58; fitted -3.2; residual 3.78; Manufacturing actual -2.77; fitted -7.6; residual 4.83; Construction actual 0.34; fitted -8.3; residual 8.64)
  - Korea, Mexico, New Zealand, Spain, Sweden: detailed actual, fitted, and residual values reported in the source for Agriculture, Non-manufacturing, Manufacturing, Construction, Trade, Finance and Real Estate, Other Services.

---

### Annex 6 — Spending on ALMPs and Job Creation (DEA analysis, precrisis 2004–07)
- Core message:
  - For ALMPs, quality matters more than quantity. ALMPs lead to new jobs only in economies without strict employment protection legislation for regular employees (EPL).
- Cross-country patterns:
  - ALMP usage relatively high in most European economies (including Germany, Sweden and Spain); substantially lower outside Europe and in emerging economies (including New Zealand, Korea and Mexico).
- DEA setup:
  - Inputs: spending on ALMPs and change in the working age population.
  - Outputs: changes in total labor force and number of employees.
  - Efficiency scores range from 0 to 1 (higher = more efficient).
- Main empirical findings:
  - No link between spending on ALMPs (as share of GDP) and DEA efficiency scores.
  - High DEA efficiency estimated for New Zealand, Mexico, Germany, and Spain; low efficiency in Sweden and Korea.
  - Panel regression with fixed country effects (25 OECD economies, Total observations: 99) — dependent variable: DEA Efficiency Scores (2004–07):
    - ln (real GDP per capita): 0.03 (column 1), 0.04 (column 2)
    - Real GDP growth: 0.08*** (both columns)
    - ALMP/GDP: -0.11 (column 1), 0.49 (column 2)
    - EPL: -0.80*** (column 1), -0.29 (column 2)
    - (ALMP/GDP) x EPL: -0.26** (column 2)
    - R-squared: 0.42 (column 1), 0.43 (column 2)
  - Interpretation of regression:
    - EPL has a statistically significant negative coefficient when entered alone, indicating lower DEA efficiency scores in countries with high EPL.
    - When including the interaction (ALMP/GDP) x EPL, the interaction term is negative and statistically significant, suggesting that high spending on ALMPs is associated with lower DEA efficiency (wasteful spending) in countries with high EPL.
    - Implication: ALMP spending appears to generate new jobs primarily in economies with low EPL. Results hold after controlling for per capita GDP and real GDP growth.

*Annex summaries and tables reproduced with coefficients, significance markers, sample sizes, and definitions exactly as presented in the source.*

*Source: Annex 4–6 of the provided IMF chapter on unemployment increases and labor market policy responses (text and tables reproduced exactly as in the supplied content).*

### Annex 7. Can Policies Reduce the Human Costs of Long-Term Unemployment?

### Annex 7. Can Policies Reduce the Human Costs of Long-Term Unemployment?

### Overview
- Recessions leave scars on the labor market; the Great Recession of 2007–09 increased unemployment across OECD economies, notably in Spain, Ireland and the United States.
- The annex makes two points:
  - Evidence from past recessions suggests the costs of the recent increase in unemployment—and particularly long-term unemployment—could be very high.
  - Recovery in aggregate demand tends to provide limited relief for the long-term unemployed; more targeted policies such as short-time work and hiring subsidies may be needed.

### Costs of long-term unemployment
- Earnings and lifetime consequences:
  - Studies for the U.S. show earnings losses persist in the long run: 15–20 years after a job loss in a recession, the earnings loss amounts on average to 20 percent.
  - The longer time spent out of work, the larger the loss of human capital and the larger the risk of becoming discouraged from participating in the labor force.
- Health and mortality:
  - Layoffs are associated with higher risk of heart attacks and other stress-related illnesses.
  - The increased mortality rate due to unemployment leads to an average loss of life expectancy from 1 to 1.5 years.
- Effects on children and intergenerational impacts:
  - Parental job loss increases the probability that a child repeats a grade in school by nearly 15 percent.
  - Evidence from Canada: children whose fathers were displaced have annual earnings about 9 percent lower than similar children whose fathers did not experience an employment shock.
  - Swedish individual-data evidence: lower parental income significantly increases children’s mortality later in life, even after controlling for children’s lifetime income and educational attainment.
- Rehire probabilities and hysteresis:
  - In the U.S., the probability of being rehired in the next month for a person unemployed for 26 weeks or more is less than 10 percent, compared to over 30 percent for someone unemployed for less than 4 weeks.
  - Longer unemployment spells risk entrenching cyclical unemployment into structural unemployment (hysteresis).
- Trends:
  - The share of long-term unemployment (6 months or more) has started increasing in some OECD economies between 2007 and 2009; in some countries (Germany, France, Italy and Japan) the share has not changed or has decreased, but was very high before the crisis, indicating structural factors hindering re-employment.

### Aggregate demand, Okun’s Law, and limits of broad stimulus
- Okun’s Law links increases in cyclical unemployment to falls in output or aggregate demand; VAR estimates show unemployment falls in response to boosts to real GDP.
- Limitations of using aggregate demand policies in 2010–11:
  - Policy interest rates are very low or at the zero bound in many countries.
  - In countries with fiscal sustainability concerns, space for fiscal policy is limited.
- Empirical evidence shows a weak response of long-term unemployment to increases in real GDP; the impact on long-term unemployment is considerably less than on aggregate unemployment. Hence, boosting aggregate demand alone may not sufficiently reduce long-term unemployment.

### Short-time work programs
- Description and intended role:
  - Programs allow firms to retain workers while reducing working hours and wages; governments typically subsidize parts of the wage bill and sometimes subsidize on-the-job training (example: Sweden).
  - Goal: spread the burden of downturns, support aggregate demand by preventing wage deflation, and reduce future hiring costs and loss of human capital until the labor market recovers.
- Usage and country experiences:
  - Extensively used in Germany, Italy and Japan; credited with dampening unemployment increases in some countries.
  - Usage and contribution to dampening unemployment have varied considerably across countries; design of programs is vital.
- Costs and risks:
  - Subsidies to short-time work are costly for public finances and create incentives for firms to free-ride once conditions improve.
  - If downturns permanently affect certain firms or industries, short-time work can obstruct necessary reallocation of resources and slow structural adjustment during recovery.
  - These efficiency costs are more relevant in recovery periods; during severe recessions, deadweight loss and diminished reallocation may be second-order concerns.
- Evidence and evaluation:
  - A systematic empirical study of short-time work merits during the crisis is still to be done.
  - Country-specific analyses matter: for Germany, Möller (2010) challenges the view that short-time work was the primary driver of the benign labor-market outcome; crisis implications (hitting export-oriented manufacturing) and pre-crisis conditions (shortage of trained workers) led to labor hoarding incentives, with the scheme supporting this incentive beneficially.
  - In Italy, persistent pre-crisis use of short-time work in some sectors (mechanical and textiles, leather) suggests the program may have delayed structural layoffs in declining industries rather than smoothing temporary shocks.

### Hiring subsidies
- Description and targeting:
  - Hiring subsidies include direct job or wage subsidies or reductions in payroll taxes; used widely in advanced economies in response to the crisis.
  - Often targeted at groups most vulnerable to joblessness: the long-term unemployed and/or youth (examples: Austria, Finland, Portugal, Sweden, Switzerland).
  - Some countries target job creation in hard-hit regions (Korea, Mexico) or specific sectors (e.g., services in Japan).
- Trade-offs and rationale:
  - In deep recessions, potential inefficiencies from hiring subsidies may be less severe than costs of rising or persistent unemployment.
  - Targeting strategies reduce potential misallocation by spurring hiring for groups most adversely affected and least likely to be rehired without subsidies.

*Source: Annex 7. Can Policies Reduce the Human Costs of Long-Term Unemployment?*

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