Labour market outlook – advantage Europe

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● Will Europe follow the US? The record 3.3m surge in US jobless claims in the week to 21 March is staggering. It confirms that the coronavirus recession is without precedent in living memory. While the near-term drop in output may be similar on both sides of the Atlantic, unemployment will likely surge by less in Europe where generous employment subsidies encourage labour hoarding in a crisis, thereby reducing the number of near-term job losses.

● Lessons from the global financial crisis (GFC): Targeted support for temporary under- or unemployment on the job can limit the number of dismissals, even in a sharp downturn. Partly due to Germany’s “Kurzarbeitergeld” subsidy for reduced working hours, German employment fell by just 1% during the GFC of 2008/09, despite a 7% peak-to-trough plunge in real GDP. In the US, where output contracted by just 4%, employment fell by a much bigger 5.4%. As our chart shows, if German employment would have responded to the drop in GDP to the same degree as US employment did to the fall in US output, it would have declined by c1.9m instead of a mere 400k.

● The continental plan: Reacting to the coronavirus recession, Germany has now expanded its employment subsidy scheme, with the UK, France and other countries deploying something similar. In the UK, for instance, companies will receive up to 80% of a furloughed employee’s wages. While the US policy response includes measures to encourage labour hoarding – such as tax credits to firms that retain employees – the policies are less generous than in Europe. In Germany, the eye-catching number in the March employment report on 31 March could be the surge in people receiving such benefits rather than the actual rise in the number of unemployed.

● Same GDP impact… The strict lockdown measures to contain the virus are crippling demand and supply in the US and Europe. In most advanced economies, GDP looks set to contract by 5-10% in Q2 2020. That would far exceed the worst drops in output during the GFC. The risks remain tilted to the downside in the near term.

● …smaller labour market impact: Thanks to the more aggressive employment subsidies, unemployment in Europe will likely rise by less than in the US. We look for unemployment to rise from 7.4% to a peak of 10.0% this autumn in the Eurozone, and from 3.8% to a 6.5% peak in Q3 2020 in the UK. For the US, we expect the unemployment rate to surge from 3.5% in February to a peak of 11.6% in Q2 2020 before declining modestly again thereafter.

● Advantage Europe: By encouraging firms to retain their workers while authorities tackle the coronavirus medical emergency, Europe is increasing the likelihood that economic activity can get back to normal more quickly once the containment restrictions are lifted step by step. This approach also limits the risk of a protracted downturn caused by a more persistent shock to demand from high unemployment. In many ways, the US, with its entrepreneurial spirit and rough and tumble dynamic markets, is a role model for the less flexible parts of Europe. But on the specific problem of containing mass dismissals during a crisis, the US could take a leaf out of Europe’s book.

Holger Schmieding

Chief Economist

+44 20 3207 7889

holger.schmieding@berenberg.com

Kallum Pickering

Senior Economist

+44 20 3465 2672

kallum.pickering@berenberg.com

Florian Hense

European Economist

+4420 3207 7859

florian.hense@berenberg.com

Disclosures

This material is intended as commentary on political, economic or market conditions for institutional investors or market professionals only and does not constitute a financial analysis or a research report as defined by applicable regulation. See the "Disclaimers" section of this report.

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