August 26, 2020

Europe expecting a tsunami of job cuts

Europe expecting a tsunami of job cuts

As government-backed furlough schemes across Europe are set to come to an end in the coming months, a study by McKinsey & Company predicts millions of jobs are at risk as companies plan to downsize to offset the loss of business caused by the Covid-19 outbreak. 

As countries locked down to counter the spread of the coronavirus pandemic, many European governments introduced furlough schemes, taking radical steps to protect people from mass unemployment by giving billions to businesses to retain their workforces.

Germany, France, Denmark, and Britain are among the countries to have introduced so-called short-time work schemes, effectively nationalizing the salaries of about 60 million private sector employees.

However, companies have gradually come to realize the market is not going to revert to what it was before the virus, with those operating well below their pre-Covid capacity now looking to downsize by cutting tens of thousands of jobs.

McKinsey predicts that as many as 59 million jobs are at risk of cuts in hours or pay, temporary furloughs, or permanent layoffs, especially in transportation and retail. 

Airbus, BP (10,000 jobs), Renault (14,600 jobs), Lufthansa (22,000 jobs), Air France, the Debenhams department store chain, Bank of Ireland, the retailer W.H. Smith and even McLaren Group, which includes the Formula One racing team, are among those planning extensive cuts across the board, from factory workers to retail employees and high-paid white-collar workers.

Some governments are trying to cushion the blow. Italy and Spain are among those temporarily extending furlough programs to the end of 2020, albeit with less money for businesses and the termination of some benefits. While France has extended wage subsidies for another two years, but is asking employers to pay a greater share.

Governments are also starting to introduce measures to ensure unemployment doesn’t become long-term unemployment. Britain is among those countries that are expanding access to benefits and investing in programs to train workers in less-affected industries.

Britain, which has an October 31 deadline for its furlough scheme, will also invest in job centers and work coaches to help benefit claimants back into work; and France is recruiting thousands of new counselors to give job seekers more personalized help.

Pierre Cahuc has written about short-time work compensation schemes for IZA World of Labor. He believes they can be a useful tool during recessions. However, he warns that “special attention should be devoted to their design as they can lead to inefficiency, both over working hours and in the reallocation of workers to more productive jobs.” He recommends “introducing experience rating, so that employers who use such schemes, and those who use them for longer, pay more toward them.” He also says that stable rules are required which are best committed to under normal economic conditions “to avoid pressure to set up excessively generous schemes during turbulent periods, since they can be difficult to turn off later.” 

“Indeed, persistently high take-up rates can be costly for society as a whole and detrimental to non-eligible workers,” Cahuc says.

Read more about long-term unemployment and recessions from IZA World of Labor.

Find more IZA World of Labor coronavirus content on our curated topics pages: National responses to Covid-19 and Covid-19—Pandemics and the labor market.