No Work in Europe Thanks to Lockdowns

Ronald Coase, the 1991 Nobel Prize laureate in economics, famously wrote: “If you torture the data long enough, it will confess to anything.” Amid the coronavirus pandemic, governments in Europe calculating the unemployment rates have proven Coase right. Indeed, throughout the Coronavirus crisis, true unemployment numbers have been found wanton, as so-called Kurzarbeit – short-term work – schemes have covered up the real repercussions of the lockdown of our economies.

Short-term work schemes date back to 1910 in Germany with the idea of lending a helping hand to those close to being fired from their work in times of crisis. Instead of being laid off, the workers are still employed albeit receiving reduced compensation. Most of this compensation is covered by the government and not by the employer. This way, for example, an employee working half the hours receives far more than half the paycheck and is still (semi-)employed.

The record of the program during the Great Recession of 2008-2009 in Germany prompted the OECD to call it “a possible role model.” The IMF hailed it as “the gold standard of such policies.” Besides keeping people from losing their job in difficult times, the program helps workers avoid atrophy of their skills. Indeed, we have argued that short-time work schemes are a better short-term option to respond to the economic repercussions of COVID lockdowns than simply throwing money around endlessly.

However, the short-time nature of most Kurzarbeit schemes has transformed in a massive program that has been going on for much longer. Money doesn’t fall from the sky and the budget constraints have become larger. Also, depending on the generosity and longevity of the program, it puts a hurdle on future employment during the recovery period. It also creates some degree of deadweight losses by subsidizing jobs that would not have been lost or by propping-up failing firms. Although such firms will eventually fail, many workers will lose valuable time upgrading their skill set.

Even more so, however, it has clouded the picture of how many people are actually more or less at home because of a scarcity of work. In April 2020, Eurostat reported an unemployment rate of 3.5% in Germany, 14.8% in Spain, 6.3% in Italy, and 8.7% in France. In the same period, however, 15% of the workforce in Germany, 21% in Spain, 30% in Italy, and 34% in France was under short-time work scheme.

As the ECB reported, on a European Union level it is estimated that in April 2020 the short-term work schemes involved 32 million people, almost three times the number of unemployed, yet the unemployment rate stood at only 6.6%.

The sharp decline in labor market participation and the exorbitant amount of people under the short-term work schemes hide the real numbers of the unemployed in the European Union, which most likely averaged a two-digit number. For comparison, the unemployment rate in the U.S. – a country without Kurzarbeit – sky-rocketed to 14.7% in April 2020, only to fall down to 6.9% in October, still almost twice as high as before the pandemic hit. Thus, these uncertain times leave us with only one certain thing – European unemployment data has to be taken not with grain but a big spoon of salt.