Unemployment in the Great Recession: A Comparison of Germany, Canada and the United States

This paper investigates the potential reasons for the surprisingly different labor market performance of the United States, Canada, Germany, and several other OECD countries during and after the Great Recession of 2008-09. Unemployment rates did not change substantially in Germany, increased and remained at relatively high levels in the United States, and increased moderately in Canada. More recent data also show that, unlike Germany and Canada, the U.S. unemployment rate remains largely above its pre-recession level. We find two main explanations for these differences. First, the large employment swings in the construction sector linked to the boom and bust in U.S. housing markets can account for a large fraction of the cross-country differences in aggregate labor market outcomes for the three countries. Second, cross-country differences are consistent with a conventional Okun relationship linking GDP growth to employment performance. In particular, relative to pre-recession trends there has been a much larger drop in GDP in the United States than Germany between 2008 and 2012. In light of these facts, the strong performance of the German labor market is consistent with other aggregate outcomes of the economy.