Policy and behavioral reactions to the Covid-19 crisis have led to the sharpest and deepest recession in many decades. Labor markets have been affected in very different ways during the early stages of the crisis, however. There is a sharp divide between Western Europe and the US, with the UK assuming a position in between. Common to all countries, vulnerable population groups have been hit particularly hard.
Most Western European countries have quickly expanded short-time work schemes, in which employers receive a subsidy for temporary reductions in hours worked. Essentially, wages are paid by governments to prevent unemployment and to preserve matches between workers and employers. Enrollment in these schemes has risen to unprecedented levels. For example, more than 20% of German employees (excluding civil servants) were on short-time work schemes in May 2020. This fraction had previously never exceeded 5%. The fractions of workers on short-time work are even larger in France and Italy, where lockdowns have been especially severe. Across countries, these schemes differ in the requirements on reductions of hours worked. In the UK, for example, there is a hard requirement of no hours at all, which is set to change in July. Enrollment in this furloughing scheme has been high, too. On top of this, unemployment has risen much more in the UK than in continental Europe.
In the US, despite the existence of short-time work schemes in many states, they are hardly used at all. Instead, unemployment has risen sharply. A large fraction of this consists of workers who expect to return to their most recent employer after a (short) period on unemployment benefits. A key difference, however, is that payments to firms are not conditioned on retaining workers, which increases fiscal costs and decreases the job protection component.
One worry about short-time work schemes is that they may prevent the re-allocation of workers and capital. While estimates show that this effect has been small in the past, it might become an issue if the Covid-19 crisis has lasting impacts on demand across sectors. Until an effective vaccine becomes available, it is very likely that sectors like tourism, cultural, or catering will see much lower demand levels. If short-term work schemes are available for too long periods of time, workers may lose valuable time that they otherwise might have spent re-training or looking for other jobs. For example, the current discussion in Germany about extending eligibility to 24 months certainly seems premature.
The crisis has disproportionately affected workers with low levels of education and low incomes. This is true both along the unemployment and the hours of work dimensions. Well-educated office workers mostly switched to working from home. In the Netherlands, we estimate the home office shares to be close to 70% for workers with tertiary education; overall hours reductions have been much smaller than for other groups. Social distancing restrictions have affected sectors that have a large component of low-skill or female employment. The low-skilled often work under increased infection risk—studies in harder-hit countries find an increased mortality risk among such groups. The economic effects on women are more negative than on men. Existing inequalities are strongly exacerbated.
The Covid-19 crisis has hit labor markets hard. Policy has shown a strong and timely initial reaction with extensions of short-time work schemes (Western Europe) or unemployment benefits (US). As social distancing will continue to hamper economic activity for some time, it is crucial to design programs carefully for the medium term. On the one hand, support will be necessary as vulnerable population groups have been affected most strongly. It is also clear that extending short-term work programs too much will slow down structural change—both of jobs and of workers’ skills—which will be required should no vaccine become available in the near future.
© Hans-Martin von Gaudecker
Hans-Martin von Gaudecker is a Professor of Economics at the University of Bonn, Germany
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