Eurozone’s Short-Time Work Programs to Cushion Blow to Jobs

“We expect Eurozone unemployment to peak at 10% in the fourth quarter of 2020, with the short-time work schemes helping to prevent a higher increase in unemployment,” said Anna Titareva, economist at UBS, in an interview with Dow Jones.

Jobless claims in the eurozone rose by 197,000 in March and the unemployment rate increased by only 0.1 percentage points to 7.4%, but the coronavirus impact was even harsher in April and economists expect larger increases in coming months.

Short-time work programs, under which companies can send their workers home temporarily or reduce their hours and the state pays a large part of their lost income, are a key defense against increasing unemployment levels. Companies save wage costs and workers maintain part of their income and keep their jobs.

UBS estimates that around 25% of all eurozone employees might enter short-time work plans during the lockdown. Despite these programs, UBS projects that eurozone unemployment at the end of 2021 will be well above where it was at the end of 2019 at 9%.

One of the three pillars of the European Commission’s coronavirus rescue plan is SURE, a 100 billion euro ($108.3 billion) unemployment fund in support of national short-time work programs.

“We do expect the unemployment rate [in the eurozone] to increase more sharply in April, but these schemes should prevent an even bigger surge in the jobless rate,” said Andrew Kenningham, chief Europe economist at Capital Economics.

In the four largest eurozone economies, a total of 33 million employees are covered by firms’ applications to short-time work, which is 20% of the eurozone’s previous labor force, he said.

Demonstrating the large impact of these policies, Oxford Economics estimates that the shadow unemployment rate, which includes workers on such short-time programs, could shoot up close to 30% in the eurozone, involving around 50 million people.

The subsidies vary by country, however, and are likely to be more beneficial in some countries than in others.

Oxford Economics has ranked short-time work programs in Europe according to eligibility conditions for workers and firms, the generosity of subsidies and the simplicity of the application process. The German and the French initiatives appear best suited to preserve employment.

German jobless claims rose sharply by 373,000 in April and the adjusted unemployment rate increased to 5.8%, the German employment agency said.

“German unemployment has risen considerably, although the increase has so far been limited thanks to the extensive expansion of short-time work benefits,” KfW’s chief economist Fritzi Koehler-Geib said. The German employment agency has received 750,000 short-time work claims since the beginning of March.

The reason why German “Kurzarbeit” is best suited to preserve employment is that it is well-known by firms and thus the bureaucratic burden is lower compared to short-time work plans in France, Italy or Spain, where these programs are less common, according to Daniela Ordonez, Chief French Economist at Oxford Economics.

The best proof of its popularity is that around 50% of German companies are introducing short-time work due to the coronavirus pandemic, while 18% plan to cut jobs, according to the latest survey conducted by the Ifo institute in April.

According to Oxford Economics, Greece, Spain, and Italy are the most exposed labor markets due to their structural conditions, such as a higher unemployment rate before the virus hit or a large share of employees on temporary contracts. Furthermore, Italy and Spain have somewhat relaxed conditions on their short-time work programs, but the frameworks remain overall more restrictive than in Germany and France.

“This means they are set to experience a sharp rise in joblessness in the short term, and permanently higher unemployment in the long run,” Ms. Ordonez said.

Short-term work programs will continue to help ease job losses as lockdowns come to an end, potentially allowing companies to gradually increase the working hours of their employees, preventing a sharp spike in unemployment, UBS’s Ms. Titareva said.

“However, a gradual increase in unemployment seems inevitable,” she said.