European Economy. Economic Papers. Germany's growth performance in the 1990's

Figure 1.8: Unemployment in per cent of the labour force 
(1970-2001)
The question arises whether Germany was exposed to labour supply shocks which, by virtue
of a limited absorptive capacity of the labour market, could explain high and rising
unemployment in the 1990s. As shown by Table 1.5, in the longer term labour supply in
Germany has, like in other countries, grown at a faster pace than population, reflecting mostly
the increasing activity rate of women. However, for a number of years following re-
unification labour force
10
growth fell short of population growth. Labour force growth during
this period was depressed by (1) the deep economic recession in 1992-93 and (2) a decrease
in the activity rate of women in the New Länder, which at the time of re-unification was
comparatively high but started to converge to the lower Western level thereafter. After 1993,
the longer-term trend of labour force growth outpacing population growth resumed.
Table 1.5: Labour Force (annual average growth)
D
(1)
F
I
UK
EUR
(2)
EU
(3)
US
JP
1971-2000
0.5
0.7
0.7
0.5
0.7
0.6
1.7
0.8
1991-2000
0.4
0.6
0.3
0.1
0.5
0.4
1.1
0.6
1991-1995
0.1
0.4
-0.2
-0.5
0.2
0.0
0.9
1.0
1996-2000
0.6
0.8
0.8
0.6
0.9
0.8
1.2
0.3
(1)
Data up to 1991 West Germany.
(2)
Euro-area excluding Germany, Greece, Ireland, Portugal and Spain
(3)
EU excluding Germany, Greece, Ireland, Portugal and Spain
Source : Commission services
On average, therefore, labour force growth during the 1990s was broadly in line with longer-
term trends in Germany. In other words, country-specific shocks to labour supply can hardly
account for the observed increase in unemployment in the 1990s. The increase in
unemployment during this period seems to reflect rather the continuation of a longer-term
trend characterised by a rate of employment creation which was too low to fully absorb the
(unspectacular) expansion in the labour force. More specifically, over the last three decades
the rate of job creation during cyclical upswings was insufficient to make up for the rate of
job destruction during cyclical downswings. This contrasts with the experience in the US and,
10
Labour force is defined here as the sum of the total number of employed and unemployed persons.

---

23
for the latter part of the period, the UK where job creation accelerated much above its trend
during upswing periods. The data suggests, however, that for the larger continental European
countries the situation improved in the second half of the 1990s, when the economic upswing
was also accompanied by an impressive expansion in the number of persons employed.
The specific behaviour of job-growth is mirrored by the development of unemployment. In
particular, the large continental European countries witnessed a sharp rise in their
unemployment rates during cyclical downturns which was not reversed symmetrically during
upturns (see Figure 1.8 above). This so-called “hysteresis” phenomenon of unemployment in
continental Europe stands in stark contrast with developments in the US and the UK where
labour redundancies built up during economic downswings were mostly (or even fully)
reabsorbed during ensuing upswings. Again, for France and Italy the situation appears to have
improved since the mid-1990, with the unemployment rate at the end of the period in these
countries roughly at the level observed at the beginning. Apparently no such improvement
occurred in Germany, where unemployment at the end of the period was almost twice as high
as that at the beginning.