GDP-employment decoupling and the slow-down of productivity growth in Germany

This paper investigates the time-varying relationship between German output and employment growth, in particular their decoupling in recent years. We estimate a correlated unobserved components model that allows for persistent and cyclical time variation in the employment-GDP linkage as well as an additional employment component beyond the one linked to GDP. Controlling for the latter yields a more precise classification of what is a jobless recovery or a labour hoarding recession. We find that productivity growth has slowed down since the Great Recession because the co-movement of employment and GDP has loosened while the co-movement with other variables than GDP has become tighter. The decoupling is of permanent nature. The development of the time-varying parameter goes hand in hand with the change of the sectoral composition of the economy, especially with the rise of the service sector. Beyond that, recent employment growth would not have been that strong if labour market tightness had not been that high and - to some minor extent - if immigration, wage moderation and working time reductions had not taken place.