GDP-employment decoupling in Germany.

• We measure and explain the decoupling of GDP and employment growth in Germany as an illustrative example of parameter instability strengthened by the Great Recession. • We apply a full unobserved components model for a time-varying parameter estimation, establishing permanent as well as transitory reasons for the decoupling. • We find that the GDP-employment linkage has permanently loosened after the Great Recession, mainly because of sectoral change. • Instead, employment growth corresponding to labour market tightness, labour supply, wages and working time increased remarkably. 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 the comovement of employment and GDP has loosened permanently since the Great Recession while the comovement with other variables than GDP has become tighter. The decoupling goes hand in hand with the change of the sectoral composition of the economy, especially the rise of the service sector. Beyond that, high labour market tightness and at the same time high labour supply carried recent employment growth. The industry mix, wages and working time had a smaller influence. [ABSTRACT FROM AUTHOR]