Americans might look at the unemployment data in Europe and wish our policy response to the coronavirus was more like theirs. Economists expect unemployment to peak at 25 to 30 percent in the United States but to reach much lower levels in Europe — only about 6 percent in Germany, for instance. While that might suggest Europe has the better strategy, this is not necessarily true: The United States has chosen the labor market policy that best suits its economy, but it should take a page or two out of Europe’s book as well.
The United States and Europe, in theory, have similar tools to protect workers in a downturn, but they tend to reach for different ones. Europeans often pay employers to keep workers on the payroll, while U.S. policymakers rely mainly on unemployment insurance to help those newly out of work. That makes the jobless rate the wrong indicator to judge the U.S. response: Mitigating, rather than minimizing, unemployment is America’s primary goal. Responding to the coronavirus, the United States beefed up its unemployment insurance scheme, loosening the eligibility criteria and paying claimants an additional $600 per week for two months.
Relying on unemployment insurance works well when the industries hit the hardest have low productivity and high turnover under normal circumstances. And according to the March employment data and more recent numbers from individual states, a large percentage of the jobs lost so far in the United States has come from sectors like that, including leisure and hospitality, retail, and temporary business services.
Consider an average full-time employee in the food industry, who earned around $500 per week before the coronavirus crisis. Average weekly unemployment insurance last year was $378, and now with the extra $600 from the coronavirus relief law, that worker could collect $978 in unemployment benefits each week for two months — nearly double what he or she was paid while employed and a relatively generous payment when there is no demand for dining out. In fact, according to the Labor Department, the median weekly earnings for full-time workers were $957 in the first quarter of 2020, so roughly half of full-time workers can collect more with unemployment insurance than they could in their jobs.
Leaning on unemployment insurance also allows those out of work to seek opportunities in other industries, improving labor market flexibility. Some companies and sectors that employed a lot of Americans before this crisis, such as restaurants, department stores, airlines and hotels, may not fully revive. Keeping workers connected to those jobs does neither them nor the economy a service. The sooner workers move on to healthier industries, the better.
That flexibility in the labor market has always been a hallmark of the American system. After the global financial crisis, for instance, it allowed workers to shift from manufacturing into service jobs. In May 2007, when U.S. unemployment was at its precrisis low, about 10 percent of workers were employed in manufacturing vs. roughly 84 percent in services. By February of this year, before the coronavirus hit, manufacturing employment had fallen to nearly 8.5 percent, and services had risen to around 86 percent.
Labor market flexibility creates more opportunities for U.S. workers, usually leading to a faster recovery after a downturn. During the Great Recession, the United States lost 5 percent of its jobs, compared with 3 percent in Europe. Afterward, it took 119 months, or slightly less than 10 years, for the U.S. unemployment rate to reach its precrisis monthly low of 4.4 percent. It had fallen to 3.5 percent in February, before the coronavirus hit. By contrast, euro-zone unemployment still hasn’t returned to its precrisis low of 6.9 percent, 151 months later. By February, it had declined only to 7.3 percent.
Unemployment insurance exists in Europe, too, but it isn’t the primary tool used to protect workers. European law tends to have more labor protections built in, which makes it more difficult for companies to fire and hire. Workers who lose their jobs there may have a harder time finding employment than their counterparts here. So it’s usually better for European workers to maintain a connection to their employer when demand falls, rather than relying on unemployment insurance.
To keep that connection in place, most European countries tend to deploy wage guarantees and work-sharing programs, whereby the government helps subsidize employees who work reduced hours. The British government announced that it would guarantee 80 percent of wages in response to the coronavirus, and countries such as Germany, France, Italy, Belgium and the Netherlands have employed work-sharing programs for decades.
Reducing employee turnover can cut costs considerably for firms and accelerate the recovery. Wage guarantees and work-sharing programs mean that European companies can rely on their existing workforce to ramp production back up once demand returns, without having to recruit, hire and train new employees.
And if the shock to demand lasts a long time, the European approach may have other advantages. A worker’s probability of finding new employment tends to fall the longer he or she is out of a job, a concept economists call duration dependence. If this downturn lasts a few quarters rather than a few months, relying only on unemployment insurance could be detrimental. Research shows that a significant drop in callbacks for interviews happens over the first eight months of being unemployed. If workers become detached from the labor force, participation rates and potential growth will decline, and the risks of social problems such as alcoholism and opioid abuse may increase.
Here is where American policymakers can learn from Europe. While 27 U.S. states have some version of work-sharing, it isn’t generally used extensively. According to the jobless claims data, U.S. employers had filed 62,297 work-sharing claims by April 11, up by 22,433 from the previous week. That’s significantly more than the jump of 9,467 in the same week in April 2019, but it’s only a drop in the bucket compared with the roughly 12.5 million Americans claiming unemployment insurance by April 11 under all programs. Takeup of work-sharing has been low in part because many businesses are unaware of their states’ programs. The new Cares Act includes resources to support existing work-sharing programs and to encourage new states to establish them.
The new Paycheck Protection Program (PPP) in the coronavirus response law also builds on the Europeans’ playbook. It provides grants to small businesses that keep workers on their payrolls, approximating a temporary wage-guarantee system. But the PPP has problems — it was rolled out after many businesses already shuttered, and it’s probably still too small. The need for speed in setting it up has led to a glitch-filled, frustrating start. It should be made permanent, so it can be activated on short notice in future recessions.
Salary guarantees and work-sharing would enhance the U.S. safety net and, at the same time, enable the economy to better cope with demand shocks. But unemployment insurance should remain America’s first line of defense for the jobless, given the country’s flexible labor market. Unemployment insurance can also be made contingent on retraining, to help funnel workers toward sectors with more opportunities. This would not only protect workers in the face of a crisis but help them adapt to the new economy that will — eventually — emerge.
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