Sunday, August 30, 2009

What Is The Real Level Of Unemployment In Germany And Japan?

With Japan having elections today and Germany facing election next month, I though now might be as good a time as any to have a look at a topic which could turn out to be very important in the months to come: the real underlying rate of unemployment in both these countries.

While the present focus of most press attention is on the fact that GDP in Germany and Japan nudged upwards between April and June (over Q1), we should never forget that this increase follows substantial falls in output. Japan’s real GDP fell at a record pace in Q4 2008 and Q1 2009 (annualized declines of 13.5% and 14.2%, respectively), and German GDP fell by a quarterly 3.5 percent in Q1 and an annual 6.7% - making for the fourth consecutive quarter of negative growth. In both cases the fall in output was accompanied by only a much more moderate decline in employment.

Part of the explanation for this lies in the fact that both countries have very substantial stimulus and employment protection programmes in place, and these to some extent mask the extent of the slump. At the same time both countries are now facing elections, and deteriorating gross debt to GDP positions. It is therefore highly likely that the positive stimulus programmes will wane somewhat after October, and the problem is to know just how far the labour markets can deteriorate further in these countries as a result. Fortunately Nomura (for Japan) and Societe Generale (for Germany) have this week produced timely studies which help us get a better picture.


The news coming out of Japan at the moment is almost uniformly bad. The unemployment rate is now at a record high, data showed today, raising even more doubts about the sustainability of the economic recovery there piling pressure on embattled Prime Minister Taro Aso just two days ahead of an election which he looks set to lose.

The jobless rate rose to a worse than expected 5.7 per cent in July, up from 5.4 per cent in June. By Spanish or Latvian standards this may seem very tame, but if you take into account the extent of government subsidised "hidden unemployment" the true underlying rate may be nearer 12 or 13%.

And adding insult to injury for Aso, Japanese core consumer prices fell at the fastest annual pace on record in again in July, potentially putting pressure on a reluctant Bank of Japan to rein in deepening deflation. Core consumer prices - the bank of Japan's preferred measure - which exclude volatile fresh food prices but include oil costs, fell 2.2% in the year to July.

Average monthly Japanese household spending fell in July by a price adjusted 2.0 percent from a year earlier to 285,078 yen, down for the first time in three months,

Also, Japan’s July exports fell 1.3 per cent on a seasonally adjusted basis from June, amid concerns about the sustainability of the country’s recovery. Provisional data out today showed that shipments in July fell 36.5 per cent b...y value year on year, outpacing the 35.7 per cent decline in June.

Japanese exports slid in July at a faster annual rate than June, raising fears the effects of global stimulus measures are starting to decline..meanwhile average salaries keep falling and unemployment keeps rising as Japan sinks deeper and deeper into deflation.

Under the scheme, as a rule the government provides two thirds of the wages paid by businesses in such circumstances. As of June 2009, some 2.383mn workers had applied for employment adjustment subsidies for 2009 onward (see chart). Although only 1.891mn had been approved as of June, Nomura expect this figure to grow closer to the number of applicants.

Nomura found that when indexing the number of those employed and real GDP to the output peak of Q4 2007 the result showed a considerable gap. Based on a simple calculation and assuming this gap to represent the amount of “hidden underemployment”, they arrive at a figure for “hidden jobless” in Q1 2009 of 4.7m. This is far higher than the June unemployment figure of 3.48m. If the hidden jobless are included together with the registered “unemployed”, they calculate that the unemployment rate would leap from 5.4% to 12.2%.

This chart shows estimates made by Nomura of the hidden jobless during past economic downturns. In the majority of cases the number of hidden jobless did not rise at all or employment fell more than GDP, suggesting that employment adjustments
were quite swift. Comparatively substantial numbers of hidden jobless rose in Q4 1973, triggered by the first oil shock and in Q2 1997, due to the Asian currency crisis, financial system concerns and a consumption tax hike. The number of hidden jobless, estimated at about 4.7m in Q1 2009, is well above the figures associated with these two downturns, according to Nomura.

However, as Nomura point out, even if the difficult labour market conditions are not fully reflected in the unemployment figures, a deterioration in adjusted labor supply-demand could easily lead to major declines in wages even while companies keep the number of hidden jobless down, thanks to government support. In fact, according to Nomura it would be hard to explain the fact that the decline in wages (total cash earnings of full-time employees) in H1 2009, at 4.7% y-o-y, was far bigger than the equivalent declines in annual average wages of 2.3% in 2002 and 0.4% in 2003, when unemployment also reached new highs, if you don't take the hidden jobless factor into account (see chart). Pressure on wages and household income could thus become a serious impediment to any genuine fully fledged economic recovery.

As of June 2009, payments under the government's subsidy scheme for employment adjustment totalled ¥101.14bn. If the number of approvals grows to meet the number of applicants, Nomura estimate total payments will increase to ¥127.42bn, placing some additional strain on fiscal finances. We think that dividing the cost of the hidden jobless and in-house unemployed between companies, households and government would be a major policy challenge for the new administration when it takes office in September. Given the seriousness of the social and political problems that result from sharp rises in unemployment, we think that while the next Japanese government may strengthen the employment adjustment subsidy scheme by, for example, further relaxing its terms and conditions, it is unlikely to try to limit the number of eligible cases by tightening conditions.

Despite the huge number of hidden jobless, however, Nomura think the unemployment rate is unlikely to rise much beyond 6.0%, largely because the government has established a subsidy scheme for employment adjustment.

The Ministry of Health, Labour and Welfare says that the aim of the scheme is to prevent unemployment by partly subsidizing wages for companies in trouble. This includes wages of staff that may be temporarily transferred and providing allowances if a business temporarily shuts down. Businesses that temporarily transfer employees (or place staff in training programs) or shut down operations after having been forced to scale back for economic reasons, or other factors such as industry realignment, for example, are also eligible.


The German job machine ran out of steam last autumn, and since that time has been adding jobs at an ever slower pace. Now it has turned negative, and less Germans are employed every month than they were a year earlier.

German unemployment rose again in July. The number of people out of work increased 52,000 to 3.46 million on an unadjusted basis. The seasonally adjusted total actually fell by 6,000, according to the statistics office due to statistical changes. Without the impact of the changes, the office estimates unemployment rose by 30,000. German unemployment began to increase in November after falling steadily for more than three years. The seasonally adjusted jobless rate was unchanged at 8.3 percent in July.

Societe Generale, take the German case, and point out that while official unemployment in Germany has in fact only risen moderately in the current recession. The unemployment rate (using the ILO measure) has risen by just 0.6ppt from its 7.1% low in Q4 2008, while in the euro area as a whole, the rate is up by 2.2ppt to 9.4% from its March 2008 low of 7.2%. As they say, it is also quite clear that this relative stability owes much to the widely-used practice of so called short-time working (Kurzarbeit).

The Societe Generale interpretation is broadly supported by survey evidence which suggests that the rate of contraction in employment has eased, pointing to a slower increase in unemployment in coming months. For example, the employment component of the PMI surveys in manufacturing has risen to 37.9 in July from a low of 32.9 in April, and in the services sector to 49.0 from a low of 45.2 in May. Employment intentions (in the European Commission survey) have also come off the lows in all sectors, but remain in negative territory, implying further job losses. That tallies with the recent evidence from official unemployment data, which have unemployment up by an average of 8,000 per month in May-July, a big shift downward from the average monthly increases of nearly 60,000 in Q1. That degree of improvement will, according to Societe Generale not be sustained, but they do not expect to see a return to the pace of unemployment gains witnessed earlier this year. Of course, as SocGen point out, company employment intentions could easily deteriorate again if growth expectations get revised down, but for the nearer term, the evidence suggests that unemployment in Germany will rise at slower rates than observed earlier this year.

They also point out that this short-time working arrangement has a "sell by" date, and can't run forever, hence there is widespread concern that a major increase in unemployment in Germany is merely a matter of time. Socgen then go on to ask themselves how wellfounded these concerns actually are, and take the view, that they are not as justified as they seem.

First of all, they note that German legislation has already extended the period for which companies can run short-time working from 18 to 24 months. Looking at the evolution of the numbers on short-time working they find that the vast majority of companies only resorted to the programme in the very recent past, so that the 24 month limit will not bite until late-2010. Until the turn of the year 2008/09, the recourse to short-time working was very small indeed; aside from the seasonal increases in the first quarters of 2007 and 2008, the numbers were small at around 50K. To put that in context, that is 0.1% of the labour force and equivalent to the monthly gains in unemployment that were recorded this year. Since then, the numbers have indeed exploded: by March of this year (latest available data), there were 1.3m workers with shortened hours, and according to official estimates, that has probably risen to around 1.4m more recently. These are clearly big numbers, amounting to about 3% of the labour force. If they were added to unemployment figures, total unemployment would rise to the previous historic peaks of around 5m. However, given that this increase only began in the final two months of 2008, these schemes could easily run for another 18 months, at least as far as the administrative rules are concerned. Whether the German fiscal position will allow this once the new government is installed is another question entirely.

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