Short-Time Work Schemes Delay Virus Hit to Eurozone Jobs

A closed restaurant in Barcelona during Spain’s national lockdown in May. As tougher restrictions are once again imposed across Europe to contain a new surge in cases, several countries have extended furlough programs to cushion the blow to labor markets.

Faced with a fresh surge in coronavirus cases, many European countries have extended the short-time work programs they first put in place to help stem the rise of unemployment during the spring lockdowns.

But while jobless rates in the eurozone are holding up reasonably well as a result, economists warn that the real effect of the pandemic on labor markets is much more severe than these official figures suggest.

Short-time work programs, which let companies send their workers home temporarily or reduce their hours while the state pays a large part of their lost income, were deployed broadly across the eurozone when the pandemic first hit. In April, a total of 33 million employees in Germany, France, Italy and Spain were covered by companies’ short-time work applications. This represents 20% of the eurozone’s pre-pandemic labor force.

Thanks to these programs, and despite a historic 11.8% contraction in eurozone economic activity in the second quarter, unemployment rates have only increased modestly in most European countries. The official eurozone unemployment rate hit 8.3% in September, up from a historical low of 7.2% in March. Without these programs, eurozone unemployment would have surged to 13% this year, according to Fitch Ratings’ estimates.

“The unemployment rate in the euro area used to be a good proxy for the cyclical state of eurozone labor market but this is no longer true amid the Covid-19 shock,” said Marc de Muizon, economist at Deutsche Bank.

Mobility restrictions and school closures prevented those who lost their jobs in the spring from seeking a new job. Statistically, these people haven’t been counted as unemployed because they weren’t actively looking for employment, the economist said.

Furthermore, the way the EU’s statistics office Eurostat measures employment means that even workers on zero hours under short-time work schemes are counted as employed. De Muizon estimates that in September, almost 5% of all workers in the four big eurozone economies of Germany, France, Italy and Spain were still on a furlough program.

As tougher restrictions are imposed across Europe to contain a new surge in cases this fall, several countries have extended furlough programs to cushion labor markets from the impact of lockdowns. Germany’s Kurzarbeit will run until the end of 2021, while France’s successor to its Chomage Partiel will be in place until spring 2022. Italy and Spain extended their programs only until the end of 2020 and January 2021, respectively, but further extensions are expected.

“Again, we won’t see a response to the shock in the unemployment rate but in the number of people in furlough programs,” said Brian Coulton, chief economist at Fitch Ratings.

Some hope for the eurozone’s labor markets has come in the form of recent news that Pfizer-BioNtech and Moderna’s vaccines proved better than expected at protecting people from Covid-19 in preliminary studies.

“The vaccine may encourage governments to keep these programs for a bit longer. It gives an exit strategy,” said Robert Ojeda-Sierra, economist at Fitch Ratings.

Short-time work programs may have helped protect jobs and social cohesion across the eurozone, but they can’t last forever, said Fabio Balboni, senior economist at HSBC. The extension of these programs during this new surge in cases means that there could still be seven million short-time workers across the eurozone by the first quarter of 2021, Mr. Balboni said.

“The challenge of reabsorbing the unemployed might have just been pushed further out in time, particularly if activity levels do not recover in full, increasing the risk of permanent scarring,” Mr. Balboni said.

Arancha Crespo has been furloughed from her job since March. For the past 18 years, she has worked as the managing director of Alta-Lai, a Spanish company that runs two children’s summer camps in the Cuenca region, in central Spain.

Alta-Lai’s camps are usually fully booked from April to August, hosting a total of 800 children every year. Last summer, all bookings were canceled. Although summer camps were allowed to open, most, including Alta-Lai, didn’t. Ms. Crespo expects the same to happen next year.

“Parents will still be afraid of the virus,” Ms Crespo said.

Her furlough has been extended until the end of January, and she is living on the allowance paid by the Spanish government. Ms. Crespo is eager to return to work, but she sees the future of the company at risk.

“I don’t know if they will be able to reopen after two years of paying expenses but without any revenue,” Ms. Crespo said.

The leisure and transport sector, which was hit the hardest by the pandemic, is very labor intensive, said Fitch Ratings’ Mr. Coulton. Social distancing and new lockdowns this fall will weigh heavily on this sector, which accounts for 12% of jobs in the eurozone, according to the credit rating agency.

The level of damage to the labor market is uneven not just across sectors, but also across age groups.

“The impact of this crisis will be much more severe for the particularly vulnerable youth age group,” said Neal Kilbane, senior economist at Oxford Economics.

Youth unemployment across the eurozone could rise to more than 23% by the end of 2020, from 15.4% in February, according to Oxford Economics. In Spain, youth unemployment could surge past 40% by early 2021, while in Italy it could surpass 30%, and in France it could rise to more than 25%, the forecasting firm said.

The policy debate is shifting from a focus on pure job protection to a focus on encouraging job creation, according to Fitch Ratings’ economists. One option would be providing employers with a wage subsidy to incentivize hiring as well as funding training courses, helping workers in the transition to more dynamic sectors, Mr. Ojeda-Sierra said.

“Governments would incentivize firms to hire people, instead of paying workers for staying at home,” Mr. Coulton said.

Write to Maria Martinez at