Rishi Sunak is holding up a metal plate that has been cut such as the words "Plans for Jobs" are appearing on it. — The U.K.’s Chancellor of the Exchequer Rishi Sunak visiting a metal fabrication business in March to promote a government initiative launched during the pandemic to help finance new and existing jobs. Source: HM Treasury

Europe’s Giant Job-Saving Experiment Pays Off in Pandemic

By Carolynn Look, Reade Pickert and Demetrios Pogkas

September 28, 2021, 12:00 AM EDT

Europe’s biggest welfare experiment of modern times is starting to look vindicated.

The region’s defining crisis response, of supporting people in jobs even when they’re not working due to the pandemic, has stood the test of 19 months of unprecedented emergency. With the U.K. ending its so-called furlough program this week, the balance of evidence so far suggests such policies averted pain for employees without delaying necessary economic renewal.

Note: Figures for France, Germany and U.K. are the total jobs in furlough; for Spain are the number of individuals in furlough; for Italy are the full-time-employee equivalents in furlough calculated by Bloomberg News (more information on our methodology note.)

That will revive the debate on whether Europe’s response was more optimal than the U.S. approach of allowing workers to lose their jobs, but addressing the fallout with expanded unemployment aid. The American model has long been touted as a way to spark creative destruction and drive a more enduring rebound.

Judgments on the success of such highly contrasting policies may well provide blueprints for the advanced world’s fiscal responses to future economic emergencies at a time when efforts to turn the tide on widening inequality have become a priority for governments.

“I would bet the European approach was much better,” said Adam Posen, president of the Peterson Institute for International Economics, a Washington-based think tank. “Most of the evidence we have is that increasing labor-market churn is harmful to people’s well-being.”

Europe’s crisis approach meant that its five largest economies—Germany, U.K., France, Italy and Spain—supported as many as 32 million jobs through furlough schemes in April 2020, a figure that has tapered off to about 4 million in the latest data available. Those economies have maintained productive capacity underpinning a strong recovery.

In the U.K., for example, unemployment is now expected to peak at around 5%, compared with fears of more than 12% at the start of the pandemic.

The region’s experience-in-the-making contrasts with that of the 2008 global financial crisis. Then markets were propped up with central-bank stimulus but many jobs were allowed to evaporate, leaving persistent scars of unemployment and inequality.

Germany, with its decades-old furlough model that supports both employers and workers when demand drops, marked a notable exception back then. Its program this time provided a model for other countries across the region to expand or create their own programs in response to the crisis. Europe’s top five economies have spent so far about €196 billion ($230 billion)—or 1.8% of their combined 2020 GDP—to save livelihoods.

Note: Totals are the most recent available for each country. Figure for Italy was calculated by Bloomberg News (more information on our methodology note.)

Meanwhile, U.S. states paid out about $790 billion across regular unemployment insurance and federal benefits in the 17 months through July 2021—or about 3.7% of U.S. 2020 GDP. That figure includes the jobless aid programs created at the start of the pandemic, such as the one for those not traditionally eligible for assistance including self-employed workers.

“The fiscal costs of letting people lose their jobs, which means less revenue from income tax or supporting them through furlough schemes, is comparable,” said Achim Wambach, president of Germany’s ZEW institute, one of the country’s leading economic research organizations.

“You’re stabilizing companies and helping them hold on to workers so they don’t have to deal with the frictions of the job market,” he said.

Safety nets in the U.S. and Europe have long been structurally different. While roughly half of American states have a program similar to Germany’s Kurzarbeit, their scope is limited, and many businesses don’t know they exist.

Instead, the U.S. focuses support on jobless workers. Although those benefits were expanded during the pandemic, quickly distributing aid to the millions who needed it proved extremely challenging.

Here’s a closer look at what to watch out for as labor markets in Europe and the U.S. recover from the coronavirus pandemic.

Job Toll

While the U.S. allowed unemployment to surge to 14.8% when the coronavirus raged in April 2020, Europe’s top five economies sought to avoid that with furlough programs, some of which were hastily created. Joblessness in the euro area peaked at 8.6%.

U.S. payrolls dropped by more than 22 million across March and April 2020. Nearly half of the jobs in leisure and hospitality vanished. While the unemployment rate remains elevated, the economy has clawed back about three-quarters of the jobs lost at the start of the pandemic.

Europe’s unemployment rates are likely to tick higher as support programs end, but the worst seems to have passed. The ultimate verdict will depend on a range of factors, including how quickly people rejoin the labor market, which jobs survive, and how persistent challenges will be for vulnerable groups such as minorities.

Bringing Back Work

A common narrative even before the pandemic was that the U.S. is better at creating jobs because of its greater flexibility in hiring and firing. During the 2008 crisis, losses were more pronounced in the U.S., but the pain lasted longer in Europe. Employment growth there only really started to recover in 2013, after the euro crisis was contained.

This time, European policy makers were worried that another slow, jobs-poor recovery would follow the pandemic. But according to Marion Amiot, a senior European economist at S&P Global Ratings in London, the opposite is happening: companies have already adjusted workforces to a longer-term perspective.

Note: Available data for France, Germany and Italy is quarterly; for Spain, U.K. and U.S. is monthly.

“The jobs recovery has definitely taken hold,” she said. “When you look at the U.S. now, the hiring process is not as smooth because you don’t have workers on the payroll. So companies are competing for new staff.”

Bringing Back Workers

In both Europe and the U.S., a key challenge is getting workers to return too. Swaths of people have given up on looking for a job altogether—for a variety of reasons—and are no longer counted as unemployed. That effect has hurt labor force participation, and distorted joblessness tallies.

In part due to an aging population, participation in the U.S. steadily declined for more than a decade after the turn of the century, but began to reverse slightly in the years before the pandemic as a tight labor market and higher wages drew Americans off the sidelines. In Europe, the share of people active in the labor market was growing.

The pandemic erased much of those gains everywhere as virus fears, business closures and shuttered schools and daycares kept millions of people from seeking work. Those effects are expected to dissipate after the crisis, but the long-term impact remains unclear.

“Once the labor market gets tighter and the pandemic effects are over, then there is only one thing left, which is: has there been a major shift in the mindset of some people about not wanting to work?” said Gad Levanon, head of the Conference Board Labor Market Institute.

Levanon reckons the U.S. approach creates faster productivity growth because it fosters a quicker adjustment of resources to growing industries. But Posen worries the crisis could cause scarring as Americans confront job losses, causing them to think twice about returning to work.

“If the U.S. system ends up producing lower labor force participation than the European system at the end of this, then that’s a pretty negative verdict,” Posen said.

The most efficient system may also depend on the nature of the economic shock, said Aysegul Sahin, an economist at the University of Texas at Austin. For example, when the 2007–2009 recession started, Sahin reckons the U.S. didn’t need as much of the labor force working in construction. But in the case of the pandemic-driven recession, the European model is “a better fit because we wanted to keep the matches intact,” she said.

Pockets of Vulnerability

Even if Europe’s approach has its merits, many economists caution that it’s too soon to tell whether safety nets there hindered necessary structural economic shifts. Many southern countries, for instance, have a strong reliance on tourism, an industry still blighted by the pandemic. Furloughs may not have provided enough incentives for people to re-skill.

“If the new jobs are going to be in a different area to where the old jobs were, it doesn’t make so much sense from a policy perspective to be supporting jobs that won’t be sustainable,” according to Brian Coulton, chief economist at Fitch Ratings in London.

For now, data show that vacancies across many sectors in Europe are outpacing demand for jobs, signaling that such concerns aren’t materializing. French companies, for example, have reported a sharp increase in hiring difficulties even as the number of people on furlough has fallen sharply with the ending of nearly all restrictions in worst-hit sectors.

Note: A more detailed breakdown of vacancy figures by sector is not available for Italy.

Europe’s welfare model didn’t help everyone. For example, furloughs were less tailored to self-employed workers, who found themselves particularly impacted by the pandemic.

For Europe and the U.S. too, assessing the long-term impact of how policies cushioned the effects on young people and women, both disproportionately affected groups, will also be a test of their success.

“It will be key to see if there are distributional consequences from the two models,” said Bloomberg Economics’ Maeva Cousin, “especially between ‘insiders’—those who were in stable employment before Covid—and ‘outsiders’—new entrants or temporary workers who would have normally been looking for employment during the crisis.”

With assistance from: Eamon Akil Farhat, Giovanni Salzano, Ainhoa Goyeneche, Andrew Atkinson and William Horobin

Edited by: Craig Stirling and Jeremy Scott Diamond

Source: Data compiled by Bloomberg News from national authorities, Eurostat and the U.S. Bureau of Labor Statistics. The most recent available figures as of September 23 are used. Some series include provisional or estimated data.

Notes on data

Number of furloughs: Data for France comes from the Ministry of Labor’s Directorate of Research, Studies and Statistics (Dares); for Germany from the Federal Employment Agency (BA) for April 2020 through June 2021 and from the Ifo Institute for July and August; for Italy from the National Institute for Social Security (INPS); for Spain from the National Social Security Institute (INSS); and for the U.K. from HM Revenue and Customs (HMRC).

In Italy, INPS publishes figures for total hours approved under two schemes: CIG, a fund that subsidizes redundant employees, and the Solidarity Fund. Figures for an equivalent of full-time employees in furlough were calculated by dividing the total hours by 8 (hours of a working day) and then by the number of working days in a month. In the U.K. the HMRC publishes daily figures; used are the figures at the end of a month.

Most recent available data is through June for Spain; through July for France, Italy and the U.K.; and through August for Germany.

Cost of furlough programs: Figure for France comes from Dares and is the cumulative total for March 2020 through July 2021; for Germany from a BA spokesperson and is the total cost since the beginning of 2020 until September; for Spain from the Ministry of Labor and Social Economy and is the cumulative total for April 2020 through July 2021; for the U.K. from the Office for National Statistics (ONS) and is the cumulative cost accrued to the country’s public finances from March 2020 through August 2021. The U.K. figure was converted from pounds to euros using the average exchange rate for the same period.

For Italy, Bloomberg News calculated the cumulative total from Q1 2020 through Q2 2021, based on Istat data on hours covered by CIG and on the estimated average hourly expenditure based on 2020 data published by INPS.

The total cost of U.S. benefits comes from the U.S. Department of Labor.

For the five European countries, total furlough cost as share of GDP was calculated using 2020 nominal GDP data from the IMF’s World Economic Outlook published in April. For the U.S., total benefits as share of GDP was calculated using the 2020 nominal GDP figure from the U.S. Bureau of Economic Analysis.

Unemployment rates: Data for France, Germany, Italy and Spain comes from Eurostat, and includes all persons in all age groups. Data for the U.K. comes from the ONS and includes persons 16 years and older. For the U.S. data comes from the Bureau of Labor Statistics (BLS) and includes persons 16 years and older.

All data is seasonally-adjusted.

In the U.K. the ONS publishes data in three-month rolling values; in this case, the latest value for the ending month of the relevant period is used (for example, for July 2021 the value for May - July 2021 is used.)

Number of employees: Data for France comes from the National Institute of Statistics and Economic Studies (INSEE) and Dares and does not include the overseas territory of Mayotte; for Italy from the National Institute of Statistics (Istat); for Germany from the Federal Statistical Office (Destatis) and includes persons with a place of work in Germany (domestic concept); for Spain from the Ministry of Inclusion, Social Security and Migrations; for the U.K. from the ONS using HMRC data; and for the U.S. from the BLS.

Available data for France, Germany and Italy is quarterly. Available data for Spain, the U.K. and the U.S. is monthly.

All data is for employees on payroll or for dependent workers.

Data for France includes persons 15 years and older; for the U.K. persons 18 years and older; for Germany, Italy, Spain and the U.S. data includes all persons.

Data for all countries is seasonally adjusted.

Participation in the labor force: Data for France comes from INSEE; for Germany from Eurostat; for Italy from Istat; for Spain from the National Institute of Statistics (INE); for the U.K. from the ONS; and for the U.S. from the BLS.

INSEE, Istat, INE and ONS define their data as the share of population that is economically active. Eurostat and BLS define their data as the share of population that participates in the labor force.

Data for France and Spain are for all persons; for Germany for persons 15 to 74 years old; for Italy 15 to 64 years old; and for the U.K. and the U.S. for persons 16 years and older. Data for France does not include Mayotte.

Data for France, Germany, Italy, the U.K. and the U.S. is seasonally adjusted. Data for Q2 2021 is not available for Germany.

Monthly figures are used for Italy, in the U.K. the ONS publishes data in three-month rolling values and in the U.S. the BLS publishes monthly figures; in these cases, the latest value of the ending month of the relevant period is used (for example, for Q2 2021 the value for April - June 2021 is used for the U.K. and the value for June 2021 is used for the U.S.)

Job vacancies: Data for France comes from the Employment Center (Pole Emploi); for Germany from BA; for Italy from Istat; for Spain from the Public Service of National Employment (SEPE); and for the U.K. from the ONS.

For the “Labor Market Mismatch” chart, data for the most recent period with available data for both workers in furlough and job vacancies is used for each country. Where needed and in order to make the furlough figures comparable with the vacancy figures, sectors have been matched or aggregated. Where figures that span different time periods had to be matched (for example, monthly figures with quarterly figures), the methods described above to use the latest value of the ending month of the relevant period were applied.

For France, job vacancy figures are for Q1 2021 and furlough figures are for March. For Germany, job vacancy figures are for August, as are furlough figures (Ifo estimates.) “All other sectors combined” includes: Agriculture and fishing, Mining, Energy, Water and sewerage, Finance and insurance, Real estate, Public administration and defense, Education, Health and social services, Arts and entertainment, Other services, Activities of household, and Extraterritorial organizations (neither BA nor Ifo publish individual figures for these sectors.)

For Spain, both vacancy and furlough figures are for June. For the U.K., the vacancy figures are for May - July, while the furlough figures are for July 31. The U.K. figures are seasonally adjusted, except for the figures for Energy.

A detailed breakdown of vacancy figures by sector is not available for Italy. Bloomberg News calculated an estimation of vacant jobs in four sectors using vacancy rates and data for the number of job positions, both published by Istat. For furloughs by sector figures, Bloomberg News calculated the full-time equivalents using furloughs per 1,000 hours worked published by Istat and the data on hours worked from the quarterly national accounts. Both vacancy and furlough figures are for Q2 2021.

Europe’s Giant Job-Saving Experiment Pays Off in Pandemic

European Workers’ Safety Nets

Cost of European furlough schemes during the pandemic

European Furlough Programs Kept Unemployment at Bay

Employee Count Rebounds

Pushed Aside the Labor Force

Labor Market Mismatch

Notes on data