Danish and German Policies Yield Contrasting Experiences with the Great Recession

Two years into the official recovery from the Great Recession, millions of Americans are still without work. While the recession hit countries around the world, many weathered the crisis better than the United States. A new report from the Center for Economic and Policy Research (CEPR) looks at 21 countries at a similar level of economic development to the United States and explores why some countries fared better than others.

The report, "Labor Market Policy in the Great Recession," focuses on Denmark and Germany, countries with very different experiences before and after the recession, and considers some possible lessons for the United States.

Denmark, which was widely seen as one of the world's most successful labor markets before the downturn, has struggled in recent years.By contrast, Germany, which went through a long, difficult transition after the unification of East and West Germany in the early 1990s, has outperformed the rest of the world's rich countries since 2007.

The secret to Germany's successful market performance, the report says, was the country's ability to spread the pain of the downturn broadly. German companies cut hours rather than workers, while partially compensating the workers for the lost hours.

"Germany's job-sharing institutions were so successful that unemployment actually fell during the recession there," said CEPR economist John Schmitt, who wrote the report. "In the United States, the incentives encourage firms to lay workers off, rather than reduce hours."

Denmark is renowned for its expensive and effective system of training, education, and job placement efforts for unemployed workers. Nevertheless, since the onset of the downturn, the Danish unemployment rate has almost doubled.

"Training, education, and job placement work well when the economy is close to full employment. But, the experience of Denmark shows that these 'supply-side' approaches just don't work if there aren't jobs to place people in," said Schmitt.

The report argues that "work-sharing" could help to lower the U.S. unemployment rate, which currently hovers near nine percent. Work-sharing programs pay part-time unemployment benefits to workers who have their hours cut. Twenty states currently operate such systems, but lack of publicity and some bureaucratic problems with the available programs have meant few employers have made use of the systems during the current recovery.

The report also suggests that a temporary tax credit to employers who cut hours rather than workers could encourage firms to not only implement work-sharing, but also expand paid sick days, paid vacation, paid holidays, paid family leave, and other forms of paid leave for workers.