Nations like Germany suffered fewer layoffs in part because they better controlled the novel coronavirus through widespread testing and tracing. The United States had six times the coronavirus infection rate of Germany. After adjusting for population, the United States had 2,307 infections per 100,000 residents vs. 382 in Germany, The Post’s data shows. But a major reason European nations never saw massive layoffs, like the United States did, is their very different approach to aiding workers in times of economic crisis.
The U.S. model is to wait until companies lay people off, then have the government step in to give unemployed workers weekly checks that tide them over until they can find a new job — or a new career. In Germany and many other European nations, companies are encouraged to avoid laying workers off in the first place.
When the coronavirus escalated in the United States in March, Congress passed sweeping legislation that gave America’s unemployed some of the most generous weekly benefits in the world: an extra $600 a week on top of their state benefits, along with a one-time $1,200 stimulus check. But the extra aid expired at the end of July. Congress has yet to approve additional money, leaving more than 25 million Americans with meager aid that is far below what struggling workers in other advanced economies receive.
In the United States, unemployment benefits typically cover about 50 percent of the median worker’s wages. This soared to 145 percent when the $600 benefit was available, according to a Journal of Public Economics analysis by three University of Chicago economists, but has returned to about 50 percent as additional benefits have expired.
In Germany, the government pays companies to keep workers on their payrolls. The German name for this is Kurzarbeit, or “short-time work” and typically pays 60 percent of a worker’s wages (higher for parents). During the pandemic, the German government has allowed for these benefits to rise to as much as 80 percent.
Comparing data across countries is always tricky. Most Americans who were furloughed for a few weeks or months were counted as unemployed. In contrast, German workers who were told not to come to work for a while were still counted as employed because the government paid companies to continue giving those workers most of their wages.
The Washington Post looked at data from the Organization for Economic Cooperation and Development, which adjusts for measurement differences to make an “apples to apples” comparison — for instance, Germany’s reported August unemployment rate of 6.4 percent is actually closer to 4.4 percent when you change the country’s definition of “unemployment” to be similar to the one used in the United States. When placed on a similar scale, the United States stands out.
In many ways, this debate boils down to what people think the post-pandemic economy will look like. Will it be similar to the pre-virus economy? That would mean hard-hit industries and companies bounce back and consumers resume their pre-pandemic behavior. If so, the European model appears better at preserving jobs and skills. But if entire companies and industries disappear and workers need to find work in a new set of growing sectors, the U.S. model could speed up the painful transition.
Proponents of the German approach say it’s far more humane for workers and easier to return to the pre-coronavirus work world. In the midst of a downturn like the current pandemic that is causing high levels of stress and anxiety, workers keep getting a paycheck from their company. The hope is that as the economy improves, companies can quickly bring those workers back to the office or factory.
“The numbers speak for themselves. From a social point of view, what Germany does is a whole lot more equitable than what the United States does,” said Desmond Lachman, a resident fellow at the American Enterprise Institute, a right-leaning think tank.
Proponents of the U.S. model say it offers flexibility and helps the U.S. economy recover faster than Europe’s. It encourages workers in industries that are declining, automating or otherwise shifting their business models to find something new. For example, if air travel shrinks so much that airlines only need a fraction of their prior workforce, then it’s better for those workers to find new jobs than for the government to keep paying them to save airline jobs.
“The pandemic was like a meteor striking. You can’t go back to the world as it was. Some jobs will be made extinct,” said Randall Kroszner, a Federal Reserve governor during the Great Recession. “It’s better to get people moving to their new jobs sooner rather than later."
Germany expanded its Kurzarbeit program before the Great Recession. Since then, its unemployment rate has remained far lower than the U.S. rate during downturns.
These low unemployment rates can have enduring positive effects. Unemployment is costly. It typically inflicts long-lasting economic damage, depressing workers’ future earnings and lengthening economic downturns.
“In the long run, we see from previous recessions, unemployment has a very persistent impact on people’s earnings prospects,” said Northwestern University economist Matthias Doepke. “Even after they find a job, it’s not the same level of pay you have before. There’s a real risk that the long-term repercussions of the crisis will be more severe.”
The United States attempted to have the best of both approaches in this crisis. Some states offer small work-sharing programs similar to Kurzarbeit, and the Cares Act that passed in March offered generous unemployment compensation and a Paycheck Protection Program that gave incentives to small businesses to rehire employees for a few months. But those programs did not get extended.
Many economists have criticized the United States for passing a temporary unemployment-aid package, the expiration of which has caused high uncertainty and anxiety for companies and workers.
“The German and French recovery plans are for 10 years. In the U.S., the initiatives have been temporary. You don’t know how long aid will last or will there even be something new?” said Simeon Djankov, senior fellow at the Peterson Institute for International Economics and former finance minister of Bulgaria. “This lack of a longer-term vision is problematic for the U.S.”
The other benefit to the German model is that the aid kicked in swiftly and automatically. In contrast, the United States needed Congress to pass legislation in March and April — and needs it again in the fall. U.S. workers and businesses also had to apply for aid, an onerous process that caused severe delays and high anxiety for millions of workers and companies. German workers who had their hours reduced or cut to zero didn’t have to do anything to start receiving government aid.
New research from Doepke, the economist at Northwestern, and University of Toronto economist Ruben Gaetani indicates there may be other long-term benefits to the German model that are only now becoming clear. The pay gap has soared between college-educated workers and less-educated workers in the United States since 1980, but it has remained flat in countries like Germany. One big reason, the economists found, is Germany’s employment-protection programs like Kurzarbeit encourage firms to invest in less-educated workers.
In the short term, the German model gets money flowing quickly to workers and gives them security during crises. The debate is still ongoing as to the superior approach for long-term labor-market health. But one thing’s clear: The U.S. approach works best for the labor force if the unemployed get sufficient help. Right now, that’s not happening.