Bite the Bullet or Extend & Pretend? Unemployment in Europe

45 million people have been furloughed in Germany, the UK, France, Italy, and Spain, but the “unemployment” rate barely budged because furloughs don’t count. Creating government-subsidized zombie companies & zombie jobs?

Unemployment in the EU has barely budged since the virus crisis began. In the first four months of the crisis, the official unemployment rate edged up from 6.5% in March, when many lockdowns began, to 7.1% in June, the last month on record. There’s one reason: Furloughed workers are not included in the unemployment stats (all charts via Trading Economics):

Most EU countries have adopted hugely ambitious job retention programs that have saved, at least temporarily, tens of millions of jobs. Each government pays companies, who in turn pay employees between 60% and 84% of their monthly wage. In some cases, the workers work fewer hours for less pay; in others, they don’t work at all. The workers take a hit to their income but their jobs remain intact, at least for the duration of the program, giving their employers time and financial breathing space to reinvent themselves for the new economic reality that is quickly taking shape.

In Germany, the UK, France, Italy, and Spain, a combined 45 million workers were registered in furlough programs at the end of May — compared to about 32 million Americans who are claiming unemployment benefits under state and federal programs. The initial duration of the programs differed significantly by country, from nine weeks in Italy to a year in Germany. But governments have begun to extend the duration of the programs.

The hope is that the economic fallout from the virus crisis will gradually dissipate, allowing many of the furloughed workers to return to their still-existent jobs, as happened in Germany during the Global Financial Crisis. Thanks to Berlin’s “Kurzarbeit” social insurance program, whereby employers reduce their employees’ working hours instead of laying them off, picking up government subsidies in the process, Germany experienced only a modest increase in unemployment, despite having suffered a 6% contraction in GDP.

But this time, the challenge is many orders of magnitude bigger and more complex. Back in 2009, just under 1.5 million workers in the country were furloughed — compared to approximately 10 million workers that applied for the program in March and April this year. In May, as the economy began to reopen, the number fell to 7.3 million, and then to 6.7 million in June.

“The decline is quite slow, and in some sectors short-time work is even increasing,” said Sebastian Link, a labor market expert at the IFO. “Furloughs among metal industry workers, for instance, jumped to 48% in June from 40% in May.”

Normally, Kurzarbeit is restricted to 12 months but it has been lengthened to 21 months since the coronavirus crisis began. Politicians across Europe have sought to do the same with their respective furlough programs.

Continue reading the article on Wolf Street

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