This is a fairly important post, but it will take me a while to get to the punch line. I’ve been trying to collect German data, but have not had a lot of success. As far as I can tell, between the 1st quarter of 2006 and the 4th quarter of 2012, the German unemployment rate fell from about 12% to 5.4%. But there seem to be different indices. In any case, that’s the jobs “miracle.” So then I began to look for other data.
RGDP rose by 8.8%, while NGDP rose by 16.94%. At annual rates that’s about 1.3% RGDP growth and about 2.4% nominal. So why such a big drop in unemployment? The German population does seem to be gradually falling, but as far as I can tell that’s not the main factor. German employment seems to have risen by around 7% to 10%, depending on the data source. Can someone help me? So that suggests either fewer hours worked per worker, or flat productivity. But as far as I can tell productivity (RGDP/hour) rose around 4% total (with incomplete data), and hours per year only fell by around 1%. But the hours number may be wrong, as I can’t tell if it includes part-timers.
So how did unemployment fall so much with slow NGDP growth? Perhaps a bit of everything. Low inflation helps; that means more RGDP for each euro of NGDP. But 8.8% RGDP growth is not very much over 6.75 years. So you then add in slow growth in worker productivity, or less hours worked per worker, or some combination.
BTW, employment in the US is down almost 1% over the same period where German employment has risen by 7% to 10%. Our RGDP is up by 6%, but that’s not good for a country with robust population growth.
Now here’s where things get interesting. NGDP grew very fast from 2006:1 to 2008:1, by 9.8% total, or about 4.8% per year. Then NGDP started falling, and despite a rebound by 2012:4 was only up another 6.2%, barely 1.3% per year. Market monetarism says that Germany should have done much worse after 2008:1 than before. Initially they did do poorly, but over the entire 2008:1 to 2012:4 period they did quite well, with the unemployment rate falling from 8.2% to 5.4%. So what’s wrong with market monetarism?
The short answer is that I took some shortcuts, instead of staying true to the “musical chairs model.” In the past I’ve often argued that a fall in NGDP causes unemployment because there is less income to pay workers, and yet hourly wages are sticky. Some workers end up sitting on the floor. The logic of that model suggests that the real problem is not unstable NGDP, but rather instability in a component of NGDP, namely total wages and salaries.
Fortunately I was able to find German data for aggregate worker compensation:
- 2006:1 286,190 mil. euros (50.5% of NGDP)
- 2008:1 303,710 mil. euros (48.8% of NGDP)
- 2012:4 347,820 mil. euros (52.5% of NGDP)
To say these number blew my mind would be an understatement. I immediately saw the annual rates were similar, and my calculator showed 3.0% growth during the huge German boom of 2006:1 – 2008:1, and then an almost identical 2.9% during the global recession and recovery, when their NGDP growth rate plunged from 4.8% to 1.3%. No wonder the Germans love the ECB’s tight money policy!!
The logic of the musical chairs model is that you should stabilize the path of aggregate nominal wages and salaries, because hourly wages are sticky. When I started blogging I assumed wage targeting would be politically impossible, and knew that NGDP targeting was already a well-regarded concept. So I latched on to NGDP targeting. But in retrospect I wish I’d latched on to aggregate employee income. Call it “income targeting.”
Recessions are not caused by less spending; they are caused by less income going to workers. Usually the two go hand-in-hand, but the German miracle tells us that when they diverge, it is employer income that matters most.
Now that market monetarism riding high, I figured it was time for a vicious internecine struggle for the soul of market monetarism. Consider this the first shot. :)
Just to anticipate one objection from my fellow MMs, I do realize that German NGDP was above trend in 2008:1, and that one could argue that it is currently near the trend line. But in that case the unemployment rate should have fallen during 2006-08, and then risen. But it fell fairly steadily.