From Washington to Berlin, officials are scrambling to find the best ways to help workers.
You can lump unemployment policies into two broad categories—the US-style efforts that provide payments to people who have lost their jobs, and policies popular in Europe that provide money to companies to keep workers on the payroll. By some measures, such as the number of people on job retention schemes, the US looks like it’s on a different planet.
Under Germany’s Kurzarbeit, which translates to “short-time work,” financially distressed employers can drastically reduce worker hours, and the government will pay most of their lost wages. The UK, like a number of other countries, rolled out a job retention scheme, which provides similar support. Unlike the German program, the UK system originally provided subsidies only for employees who didn’t work, but was later amended so companies could bring furloughed employees back on a part-time basis. At its peak in May, 30% of the UK workforce was furloughed.
As the UK’s furlough program winds down, Germany (which can easily afford it) is doubling down on support for its job market: Berlin is extending short-time work subsidies that were supposed to expire in March to the end of 2021.
The US is going in the opposite direction, as the beefed-up unemployment benefits that provided an extra $600 a week to qualifying jobless people have expired. Temporary enhancements to Canadian and US unemployment insurance had, briefly, turned those systems “into some of the most generous” in the world, according to economists at Goldman Sachs.
The difference in policies explains why the US unemployment rate of 8.4% is so much higher than than those of the UK and Germany, which are about half that. The US’s unemployment rate is even greater than that of the entire EU, which typically runs several percentage points higher than the US.
While the US and European unemployment rates appear far apart, the actual states of the labor markets are surprisingly similar. The change in total hours worked in the US and Britain are roughly parallel, which shows that a good chunk of people in the UK counted as employed are actually on government support. In Britain, more than 5 million people, including furloughed employees, were temporarily away from work in July. Economists widely expect the number of unemployed Brits to jump higher when the furlough support ends next month.
The systems may not always be as different as they appear, says Allison Schrager, a senior fellow at the Manhattan Institute. In the US, consider unemployed hairdressers who know they will have a job when their salons reopen. If they’ve been able to receive unemployment benefits, that means they’ve effectively been on a government-supported furlough program, Schrager points out.
Subsidies that keep workers on the payrolls could be a good thing if the pandemic disruption is temporary. If the world goes back to something resembling business as usual soon, it will save employers time rehiring, potentially giving them an edge over employers that struggle to find talent and end up forgoing money-making opportunities.
Or maybe the world doesn’t go back to the way it was before, or it doesn’t do so quickly enough. The pandemic is dragging on much longer than many expected back in March, and getting to something resembling “normal” may not happen until 2022 or even later. Furlough schemes are expensive, and it’s not clear that every country can afford these programs for such a long haul. If they can’t, politicians might be better off allowing their labor market to go through a painful reorganization rather than shielding it.
The economy could also be much different on the other side of the pandemic. Many technology trends, from digital payments to virtual work, have been accelerated, Schrager said. Trying to resist inevitable changes in the job market could be costly.
The stakes are high. Officials in countries like Germany may find that they’ve preserved companies that are no longer viable, while US politicians may have allowed support to lapse while the economic malaise is far from over. For now, European-style employment support has probably relieved a lot of emotional anguish for workers who lose jobs there, while jobless Americans will be highly incentivized to find work—albeit in an economy that has fewer opportunities than it did in January.
It will take time to know whether the US’s far less cozy job market results in a more dynamic recovery with fewer so-called corporate zombies, and, ideally, with more jobs that are of higher quality. While the pandemic has resulted in a massive labor policy experiment, don’t expect anyone to agree on the best policies anytime soon.