Labor Adjustment Under Different Institutional Structures:
A Case Study of Germany and the United States
Upjohn Institute Working Paper 94-26
Susan N. Houseman and Katharine G. Abraham
JEL Codes: J23, J65, J83
Abstract
Like most Western European countries, Germany stringently regulates dismissals and
layoffs. Critics contend that this regulation raises the costs of employment adjustment and
hence impedes employers' ability to respond to fluctuations in demand. Other German labor
policies, however, most especially the availability of unemployment insurance benefits for
those on short time, facilitate the adjustment of average hours per worker in lieu of layoffs.
Building on earlier work, we compare the adjustment of employment, hours and
inventories to demand shocks in the German and U.S. manufacturing sectors. We find that, in
the short run, whereas U.S. employers rely principally on the adjustment of employment levels
to respond to demand shocks, German employers rely principally on the adjustment of average
hours per worker. The adjustment of overall labor input is generally similar in the two
countries. Short-time work makes a very important contribution to short-run hours adjustment
in Germany. We find little evidence that inventories help to buffer demand fluctuations in
either country. Our findings suggest that, given appropriate supporting institutions, strong
worker job security can be compatible with employers' need for flexibility in staffing levels.
NOTE: A revised version of this paper was published in F. Buttler, et al., eds. Institutional Frameworks
and Labor Market Performance: Comparative Views on the U.S. and German Economies. London: Routledge, 1995. Please cite that chapter instead of this working paper.
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