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Unemployment in the United States is now almost 15%, the highest since the end of the Great Depression. But in Western Europe, things have worked out very differently during this pandemic. Tens of millions of people stopped working but didn’t lose their jobs. Across the continent, employees have taken advantage of various short-term-leave schemes, in which the government pays their salaries until activity can resume.
In most countries, the programs already existed before the arrival of COVID-19, in place to allow employers to temporarily reduce output in a downturn without firing workers, but they have been radically expanded to deal with the virus. In France, Germany, Italy, Spain, and the United Kingdom, it was estimated recently that over 20% of the workforce was on one of these plans.
Governments are spending a lot of their own money in order to keep unemployment down, make sure that paychecks continue to arrive (even if workers often don’t get 100% of their normal wages), and ensure that companies can just pick up where they left off as stay-at-home measures end.
The difference in numbers is striking. The IMF expects German unemployment for 2020 to hit around 4%, and in the more volatile U.K., the Bank of England recently warned that unemployment may double — to 9%.
“These schemes have done a lot to keep unemployment down,” says Jessica Hinds, an economist at Capital Economics in London. “And since the workers are getting paid, that means that consumer spending should recover more quickly. But there are also benefits for the companies, since they retain the same staff with the same skill set. Workers don’t have to deal with uncertainty, and the larger economy doesn’t have to incur all the efficiency losses that could be associated with a lot of firing and rehiring.”
The most famous — and longest-running — of these European programs is the German “Kurzarbeit,” or “short-work” scheme. It dates back to the early 20th century and is credited with being one of the reasons Germany recovered so quickly from the 2008–2009 recession. Employers can respond to short-term reductions in demand by simply notifying the government, which gives firms the money they need to pay most of the difference. Since the financial crisis, many other large European countries have copied the program or expanded their own versions. They were designed for normal economic downturns but have been perfectly suited to the pandemic.
Katharina Luz is an analyst at Daimler AG, the company that makes Mercedes-Benz cars. Last month, human resources informed her that her hours were being cut to zero and she would be going on Kurzarbeit. The government is paying 60.5% of her wages, and Daimler is paying another 20% (as her union contract stipulates), so she is getting 80.5% of her normal salary. All of this stability and convenience are very important to her right now, since Katharina is expecting her first baby this year. When she was relieved of her office duties, she and her partner left Stuttgart to hang out at her childhood home near the Black Forest.
“We have been organizing our lives, doing lots of mountain biking, and having lunch with my mother every day. We just started restoring some antique furniture to put to use when the baby arrives,” Luz said on a conference call with representatives from the company. “To be honest, Kurzarbeit has been just really nice for us.”
The latest version of the German scheme can be extended for up to 21 months, and firms are eligible if at least 10 percent of their workers had their hours cut by more than 10 percent. Kurzarbeit also allows for flexibility in the number of hours worked, so Katharina may work 16 hours (two days) in an upcoming week, to prepare a report, but stay on Kurzarbeit. Companies can use this flexibility to slowly ramp up production as life gets back to normal.
Things are slightly different in the United Kingdom, the largest European country to have built a furlough scheme from scratch this year. There, it’s all or nothing — meaning that Susu Laroche, an artist who works as an invigilator (gallery attendant) for Hauser & Wirth in London, is totally off. Even before the pandemic, it was an on-and-off job, but she is still getting paid now, based on the average amount she worked per month in 2019. She’s grateful to be furloughed. “I’m just staying home and making art,” Laroche said. “And I finished a new solo EP.”
Countries are largely paying for the schemes by taking on additional debt. On the continent, the arrival of COVID-19 has reignited a perennial European debate as to whether E.U. countries should share more costs or make each country mostly go it alone.
Twenty-six states in the U.S. actually have some kind of similar program, says Alexander Hijzen, an economist at the OECD, but they are relatively unknown and not quite generous enough to make it worth it for employers to use them. “There are costs to participating in those kinds of schemes, since companies still have to pay social security and healthcare,” Hijzen said. “Whereas in the United States, just laying somebody off usually doesn’t cost anything.”