By Michael Birnbaum
April 12, 2020 at 1:51 a.m. GMT+9 The Washington Post
BRUSSELS — The coronavirus pandemic is sending U.S. unemployment figures to levels that could rival the Great Depression. In Washington, that might feel like the inevitable consequence of a health crisis that has forced a sudden halt to much of the economy. But the situation across the Atlantic suggests the dramatic rise in U.S. unemployment — with 17 million people filing for benefits in the past four weeks — is a choice.
But isn’t Europe also on lockdown?
The economic situation in Europe is just as grim.
The French Central Bank estimates its country’s economy contracted by 6 percent in the first quarter, the worst plunge since 1945, for instance. But so far, workers are largely protected. Many governments have stepped in with costly programs to subsidize their wages to avoid layoffs.
The consequences have been dramatic. Prominent German economic institutes anticipate a bump in Germany’s unemployment this year ranging from 0.2 to 0.5 percentage points. The Ifo Institute for Economic Research thinks the unemployment rate in Germany will peak around 5.9 percent midyear before subsiding.
(In most European countries, official unemployment figures are not released as quickly as in the United States, so many numbers remain estimates for now.)
Compare that with the United States, where JPMorgan Chase estimates unemployment could hit 20 percent in the second quarter.
In Germany, for instance, 650,000 employers had notified employment agencies by last week of their intention to make use of the country’s short-time work program. Under the system, employees have their hours scaled back, and the government pays them up to two-thirds of their normal salary, while the employer pays little or nothing. Once the employer is ready to pay full wages again, everything returns to normal — there are no layoffs.
Many economists credit the system for having enabled Germany to come roaring back after the 2008 global financial crisis since its companies did not lose the expertise of their workers and were ready to zoom to full capacity once the recovery started. This time, many European countries have imitated their neighbor.
Isn’t that expensive?
It certainly is. But so is a major economic contraction. Ordinary unemployment benefits in Europe also tend to be more generous than those offered in the United States, so the difference between subsidizing employment and cushioning the blow of layoffs is more limited.
Germany’s employment agencies have already asked for an extra $11 billion to help address the demand.
The French system, meanwhile, is already covering 8 million people — a third of the country’s private sector workers. The French government will cover up to 84 percent of a worker’s salary, and the Labor Ministry estimates the costs will be $21 billion over the next three months.
But, as in Germany, the payoff will be that French unemployment increases will probably be fairly limited. One private analytics firm, Xerfi, estimates that the rate will rise to 9.6 percent this year, up from 8.5 percent in 2019.
The bump — though it will be painful — is a relative hiccup compared with the size of the economic disruption. French Labor Minister Muriel Pénicaud has said that half the country’s economy has come to a halt.
In Britain, the government has promised to subsidize up to 80 percent of workers’ salaries so long as they are not laid off, but it is struggling to get its program up and running. The Institute for Employment Studies estimates the cost of the British program could be $50 billion over three months. The institute believes unemployment has already doubled, from 3.9 percent to 7.5 percent, which is above the highest point during the crisis that started in 2008.
Hard-hit Italy, meanwhile, has simply banned its companies from making layoffs for 90 days.
Could something go wrong?
The wage-subsidy programs will work best if the pandemic-related shutdown is relatively short. If that happens, then companies will be well-positioned to speed back to business with their old workforce in place — and, of course, the workers will have suffered far less economically in the meantime.
If the shutdowns drag on — into 2021, for example — then the programs will be far more costly, and they may also be significantly less effective.
The longer the economy remains in a coma, the more likely it will have changed in major ways once it reopens. If people start traveling less, for instance, it may not be sustainable to keep subsidizing the wages of airline or hotel workers whose industries may not bounce back to pre-pandemic levels.
But European governments have committed to this approach for the time being.
“We have one of the strongest welfare states in the world, and we have built up reserves for difficult times during good times,” German Labor Minister Hubertus Heil said last month.
Could the United States do the same thing?
A lot of damage has already been done in the United States. Companies that laid off their workers may not take them back.
In Europe, many governments had programs in place as part of their safety nets already, and simply expanded them to meet the size of the crisis.
Still, there are some suggestions coming from unlikely quarters that Washington try something similar. Sen. Josh Hawley (R-Mo.), a strong Trump backer, said the United States should copy the British program and cover 80 percent of wages.
“The goal must be to get unemployment down — now — to secure American workers and their families, and to help businesses get ready to restart as soon as possible,” he wrote in a Washington Post op-ed.