• The eurozone labour market has deteriorated at an unprecedently fast pace during the pandemic…
• … with the rise of the unemployment rate reflecting only a small part of the underlying deterioration in the labour market
• Broader indicators of labour market slack are rising much faster than the unemployment rate, while inactivity has increased
• On top of that, a large proportion of employed people currently are in temporary unemployment schemes and could still lose their jobs eventually
• Supporting economic growth and job creation is a major motivation behind the design of the EU Recovery Fund, with its allocation key largely based on past levels of GDP per capita and the unemployment rate
• Our calculations suggest that the current allocation under the Recovery Fund will support the economies in the periphery of the eurozone the most …
• …. yet, the funds are expected to heal only a fraction of the blow that the pandemic has given to the eurozone labour market

200930-Eurozone-Watch-Recovery-Fund-repairs-only-a-bit-of-the-blow-to-the-labour-market.pdf (255 KB)

The blow to the labour market

The eurozone economy tumbled into a deep recession in the first half of this year. Meanwhile, employment shrank by 2.9% qoq in Q2, following -0.3% in Q1. This implies that during the first half of 2020, more than 5 million jobs were lost in the eurozone.

The fact that employment was much more resilient than GDP implies there was an exceptionally large drop in production per employee during the economic downturn. To compare, if GDP per employee had remained constant during 2020Q1-Q2, around 19 million jobs would have been lost.

This drop in GDP per employee can partly be explained by the wide use of government subsidised short-time work schemes (STW). STW is designed to allow companies to temporarily reduce the number of working hours of employees (often to zero) while keeping them on the payroll.

The government reimburses the companies what they have paid to these employees, which often is around 70-80% of their normal hourly pay. According to the methodology used by national statistics bureaus, all persons that are in STW are recorded as being employed, even when working zero hours.

Short-time work schemes have cushioned the drop in employment

Data and estimates from national statistical bureaus, the OECD and the ECB show that at during the peak of the Covid-19 crisis (April-May) roughly 20% of all employed people were in STW in Germany and Spain, while in Italy and France this share was even around twice as high (35-40%).

In numbers, this means that in these four largest eurozone countries in total more than 25 million people were in STW in April-May.

Since the end of the hard lockdown (which was around mid-May in most eurozone countries), the number of people in these schemes has declined.

Nevertheless, recent data from Germany’s Ifo Institute and France’s DARES show that in Germany 11% of all employees (3.7 million people) still were in STW in September (21% of all employees in industry and 12% of all employees in services). In France the share of employees in STW still was around 9% in July (2.4 million people).

The break-down into detailed data in Germany and France shows that the share of STW in total employment was large in the services sector as well as in manufacturing in the months following the end of the lockdown. The sector with one of the highest shares of employees in STW was hospitality (in each country around 35% of all employees in the sector).

However, large shares of STW could also still be found in car manufacturing (around 30% of employees in Germany and around 40% in France) and transport & storage (around 15% in Germany and around 20% in France).

The fact that STW schemes were still widely used in these parts of Germany’s manufacturing sector, which have neither been subject to strict lockdown measures nor are limited by social distancing or limitations to international travel, suggests that the use of the STW represents some hidden unemployment. This means that there is a high probability that a significant proportion of these employees will lose their jobs after all in the coming months.

Broader definition of labour market slack has jumped higher

Another source of hidden unemployment in the eurozone consists of people that are without a job but do not meet the strict definition of unemployment that is used by statistical bureaus in the eurozone and by Eurostat (people that are without work, and are available to start working withing the next two weeks and have also actively searched for work in the last four weeks).

As a share of the labour force, the share of marginally attached persons increased by 1.4 percentage points (almost 400,000 people) in France between 2020Q2 and 2019Q4, by 3pps in Italy and Portugal, by almost 3.5pps (800,000 people) in Spain and 2.5pps in Austria.

People that are marginally attached to the labour market represent an important part of labour market slack. Including the marginally attached to the official eurozone unemployment rate would raise this rate from its current level of close to 8% to approximately 10.5% according to our calculations.

Rise in unemployment has been limited by people leaving the labour force

A final source of labour market slack is that a large number of people have actually left the labour market and have become totally detached, i.e. they are neither working, nor unemployed, nor marginally attached to the labour market. For instance in France around 400,000 people have left the labour market and in Spain around 450,000. If these people do not re-join the labour market to become employed, income per capita in that country will have become permanently lower.

EU Recovery Fund for sustainable and resilient recovery and job creation

On July 21st, EU-leaders reached agreement on a Recovery Fund of EUR 750bn.

The Recovery Fund, part of the EU’s multiannual budget for 2021-2027, will be frontloaded, meaning that the majority of funds will be allocated within the next few years. Although no timeline has been agreed for the additional EUR 77.5bn in grants and EUR 360bn in loans, we assume that these additional grants and loans will be frontloaded accordingly.