4/24/2020 America Is Having an Unemployment Apocalypse During the Coronavirus Pandemic. Europe Chose Not to.

ARGUMENT

America Is Having an
Unemployment Apocalypse.
Europe Chose Not to.
A trans-Atlantic chasm has opened up on pandemic labor policy. We’ll soon know which
side got it right.
BY SIMON TILFORD | APRIL 4, 2020, 1:48 AM

T
he coronavirus pandemic has dramatically changed economic life across
Europe and the United States. By confining people to their homes, leading them
to spend far less money than they otherwise would, the West has seen a collapse
in consumption, threatening the survival of a sweeping number and range of firms,
from restaurants to airlines to car manufacturers. This, in turn, has produced a sudden
and unprecedented collapse in demand for labor. The United States has witnessed a
dramatic rise in jobless claims—a scarcely believable 10 million over the last two weeks.
This is uncharted territory for labor markets, and so it is unsurprising that different
countries have adopted different strategies for coping with the looming unemployment
crisis.

Many European countries are cushioning the impact of the crisis on their labor markets
by employing a system pioneered in Germany and Austria called Kurzarbeit (short-time
working). In essence, it involves reducing the number of hours a firm’s employees work
to reflect the fall in demand, but their salaries are reduced by much less than the
reduction in hours, with the country’s federal labor office funding the difference. Put
simply, it is a form of wage subsidy.

Which approach is most likely to limit the long-term economic damage? The U.S. one of
rapid cuts in employment in order to match the supply of labor with the suddenly
depressed demand for it? Or the European approach of attempting to keep as many as
possible at work? This will depend to a large extent on the length of the downturn: Can
we look forward to a rapid, “V-shaped” recovery and limited loss of economic activity,
or are we facing a longer recession or even something akin to a depression?

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Many credit Germany’s rapid economic bounce-back from the 2008-2009 financial
crisis to its system of Kurzarbeit. German unemployment rose less than in comparable
countries, enabling German firms to hold on to skilled workers, which in turn meant
that they could respond more rapidly once global demand started to recover. More
European countries, including France and the United Kingdom, are pushing variations
on the German approach during the current crisis in the hope of limiting the long-term
impact to their economies.

Kurzarbeit is especially suited to Germany and other European countries with highly
regulated labor markets and generous unemployment benefits. For example, it is
expensive for firms in Germany to lay off workers; the procedure is lengthy, and they
often have to pay for large compensation packages. German businesses are therefore
understandably keen to avoid laying people off, especially when they believe that they
will soon have to rehire workers. Second, unemployment benefits are high; a German on
a full-time permanent contract who has worked more than 12 months will typically
receive unemployment benefits of 60 percent of their net salary for 12 months; this rises
to 67 percent for someone with children. As a result, wage subsidies can be a cost-
effective option for government.

There is no tradition of Kurzarbeit in the United States. When demand for labor falls,
the number of workers typically falls rapidly to reflect the drop—there is no attempt to
divide up the remaining demand for labor among the existing number of workers. One
reason is that it is cheaper and much less complicated for U.S. firms to shed workers.
Another is that unemployment benefits are traditionally low compared with those in
many Western European countries, hence public subsidization of private sector wages
can seem expensive.

Typically, only a small proportion of European workers have been covered by

Kurzarbeit schemes: full-time workers in larger firms, disproportionately in
manufacturing sectors. Those in non-unionized jobs or on temporary contracts have
not tended to be covered. But Kurzarbeit schemes are being rapidly expanded—the
German federal labor office estimates that 2.4 million workers will soon be covered by it
—and it is not an exaggeration to say that the current crisis has opened a continental
chasm on labor market policy. The United Kingdom has usually been closer to the
United States than the rest of Europe when it comes to labor market policies, but it has
now put in place a government program to pay up to 80 percent of private sector
salaries (capped at just over $3,000 a month).

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4/24/2020 America Is Having an Unemployment Apocalypse During the Coronavirus Pandemic. Europe Chose Not to.

Do the Europeans have it right? Much will depend on the length of the downturn. If we
see a rapid economic recovery from the third quarter (July to September) of the year,
then the European approach will probably be vindicated. The rise in unemployment
will have been lower in Europe than in the United States, firms will have retained more
skilled workers (and their loyalty), and these companies will be better placed to ramp up
production quickly, much as German ones did back in 2009. By contrast,
unemployment will have risen much more in the United States, and households will
have suffered more financial damage, causing more corporate bankruptcies and with
them pressure on the financial sector. U.S. firms will face the costly and time-
consuming process of rebuilding their workforces.

But what if the downturn is more protracted and the recovery is weak? This could easily
happen if governments are forced to maintain the lockdowns for longer and are then
only able to ease them gradually, as appears to be the case in China. Kurzarbeit is not a
long-term solution for a number of reasons. First, it is costly. In countries with generous
unemployment benefits, this cost initially looks manageable. But even in Germany very
generous unemployment benefits do not last forever. Second, the longer Kurzarbeit
goes on, the more socially inequitable it can become; those workers with full-time jobs
in the sectors covered by these schemes are largely protected from the downturn, while
others—many of whom are poorer—face the full brunt. Third, the longer the downturn,
the greater the likelihood that consumption and investment patterns will shift and the
challenge will not be to kick-start existing production capacity but to shift resources—
capital and labor—into new industries. In this situation, Kurzarbeit could distort wages
and hold back necessary structural changes in an economy. For example, it is possible
that demand for German cars—at least the gas-powered variants—will never properly
recover from this crisis. It may therefore make little sense to artificially maintain
employment levels in that industry.

If we suffer a prolonged downturn and weak recovery, other factors will have a bigger
impact on how economies fare than whether or not they employ Kurzarbeit schemes.
Countries that succeed in ensuring that households can pay their rents and mortgages
and maintain a decent level of consumption (thereby keeping a limit on corporate
insolvencies), and guarantee universal access to health care will likely come through
the crisis in better shape than those that do not.

The U.S. administration has certainly stepped up emergency support for businesses,
while the Federal Reserve—like the European Central Bank and the Bank of England—
has moved aggressively to boost liquidity in an effort to head off a financial crisis. The
CARES Act passed by Congress at the end of March also increases unemployment

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4/24/2020 America Is Having an Unemployment Apocalypse During the Coronavirus Pandemic. Europe Chose Not to.

benefits and the number of people who qualify for them. But even after these changes,
which U.S. labor unemployment offices are struggling to process, most Europeans have
better unemployment and welfare benefits—and, crucially, poor and jobless Europeans
have better access to health care. The U.S. government could easily address these issues
by spending more money. The world wants dollars, now more than ever—the yield on
10-year U.S Treasury bonds is currently just 0.7 percent. Although this would no doubt
prove cheaper for the United States in the long term, there is little to suggest—at least so
far—that it will significantly boost spending on social programs.

The United States has a better record than Europe of channeling money and workers
into new, fast-growing industries, suggesting that it could yet emerge from the current
crisis in better shape than Europe. But the pace of innovation has slowed in the United
States in recent years, with competition waning and markets becoming more
concentrated than in Europe. While U.S. technological leadership is not in question, in
many ways European capitalism looks to be in a healthier state. If—and it is a big if—
the EU can make it through the coronavirus crisis without the eurozone coming apart
and throwing the region into chaos, it may yet emerge from this with fewer scars than
the United States.

Simon Tilford is the director of research at Forum New Economy. Twitter: @SimonTilford

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