How should governments manage recessions?

The responses of working hours and employment levels to temporary negative demand shocks like those caused by the Great Recession in 2007–2008 and the Covid-19 pandemic in 2020–2022 have shown that consideration of both is important. Workers’ desired rises in working hours in times of recession also serve to modify the standard measure of unemployment. During Covid-19, both jobs and earnings were temporarily protected among workers forced into short-time work schemes, providing a useful comparison with the provision of improved unemployment insurance to unemployed workers at that time.

Recessions are complex events that affect personal health and behavior via various potentially opposing mechanisms. While recessions are known to have negative effects on mental health and lead to an increase in suicides, it has been proven that they reduce mortality rates. A general health policy agenda in relation to recessions remains ambiguous due to the lack of consistency between different individual- and country-level approaches. However, aggregate regional patterns provide valuable information, and local social planners could use them to design region-specific policy responses to mitigate the negative health effects caused by recessions.

The fear of unemployment has increased around the world in the wake of Covid-19. Research has shown that job insecurity affects both mental and physical health, though the effects are lower when employees are easily re-employable. The detrimental effects of job insecurity could be partly mitigated if employers improved other aspects of job quality that support better health. But as job insecurity is felt by many more people than just the unemployed, the negative health effects during recessions are multiplied and extend through the majority of the population. This reinforces the need for effective, stabilising macroeconomic policies, most especially at this time of pandemic.

Government schemes that compensate workers for the loss of income while they are on short hours (known as short-time work compensation schemes) make it easier for employers to temporarily reduce hours worked so that labor is better matched to output requirements. Because the employers do not lay off these staff, the schemes help to maintain permanent employment levels during recessions. However, they can create inefficiency in the labor market, and might limit labor market access for freelancers and those looking to work part-time.

The share of workers employed part-time increases substantially in economic downturns. How should this phenomenon be interpreted? One hypothesis is that part-time jobs are more prevalent in sectors that are less sensitive to the business cycle, so that recessionary changes in the sectoral composition of employment explain the increase in part-time employment. The evidence shows, however, that this hypothesis only accounts for a small part of the story. Instead, the growth of part-time work operates mainly through reductions in working hours in existing jobs.

Unemployment in Europe is excessively high on average, and is divergent across countries and population groups within countries. On the one hand, over the past decades, national governments have implemented incomplete institutional reforms to amend dysfunctional labor markets. On the other hand, EU supranational policies—those that transcend national boundaries and governments—have offered only limited financial support for active labor market policies, instead of promoting structural reforms aimed at improving the functioning of European labor markets. Better coordination and a wider scope of EU supranational policies is needed to fight unemployment more effectively.