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Labour productivity, measured as GDP per hour worked, slightly increased in the second quarter of 2020, in contrast to a large decline in GDP per employee. While the cyclical nature of labour productivity is an empirical fact, the significant difference between the change in GDP per employee and that of GDP per hour worked is unusual. In the second quarter of 2020, EU GDP per hour increased by 0.3% relative to the same period of 2019, whereas GDP per employee fell 11.5%. A difference of this scale was not seen even at the peak of the recession following the global financial crisis. In 2009, for instance, EU GDP per hour fell 1.2%, while GDP per employee declined by 2.6%. The difference in 2020 indicates the extent of the employment subsidies that most EU governments made available to businesses in the second quarter of 2020.

Massive government support kept the increase in unemployment relatively contained at the end of the third quarter of 2020 (Figure 13). The unemployment rate rose by about 0.5 percentage points in Western and Northern Europe and Central and Eastern Europe (Figure 13a). The increase was higher in Southern Europe (1.5 percentage points). The United States saw an increase of 4 percentage points over the same period with a peak of 10 percentage points in April. The difference between the two sides of the Atlantic can be mostly explained by significant differences in labour-market institutions and also by substantial government financing of policies to retain labour (Box D). The effect of government measures can also be indirectly gauged by comparing the contained increase in unemployment with the steep decline in total hours worked across the European Union (Figure 13b). This suggests that if employment was not subsidised, the increase in unemployment would have been much greater (Box D for caveats).

Figure 13

Unemployment and total hours worked

Source: Eurostat and EIB staff calculations.

Increasing risks of a slow recovery and a substantial increase in government indebtedness do not bode well for the unemployment outlook in the near term. General government debt in the European Union increased by 8.5 percentage points of GDP to 88% from the first to second quarter of 2020 as the pandemic intensified. The sharp increase in debt is likely to curb governments’ ability to act as decisively should the pandemic’s second wave require further restrictions in the fourth quarter of 2020 or first quarter of 2021. With a stalled recovery and, possibly, a weaker fiscal response, unemployment is bound to increase significantly. Higher unemployment will exert additional pressure on social protection systems to extend their remit to parts of the population not covered by current programmes (Box C).

Box C

Social protection systems and the COVID-19 shock: Adapting short- and long-term support

Social protection systems play a central role as stabilisers when economic shocks occur. Unemployment benefits are clearly countercyclical but other forms of social spending such as pensions or sickness benefits also contribute to maintaining households’ disposable income in times of economic stress. Structurally, social protection systems help to reduce the incidence and depth of poverty, improve the health of the population and facilitate access to education.

The stabilising effects of social protection systems are stronger in higher-income countries due to the size and composition of spending. EU Member States with higher incomes spend relatively more on social protection and typically place greater emphasis on sickness, family and unemployment benefits (European Commission, 2019). Following the global financial crisis, social protection expenditure increased, reflecting in particular the higher spending on unemployment benefits following the shock to the economy.

The pandemic prompted unprecedented policy action to support firms and households. The introduction and/or extension of short-time work (government programmes that subsidised the salaries of workers whose hours were temporarily reduced for economic reasons) is a distinctive feature of this crisis (Box D) but all governments have gone further. Their action includes providing easier access to regular support instruments in the event of unemployment or sickness, a stronger emphasis on safety and health protection at workplaces, increased support for parents staying at home or additional child/family allowances. In addition, housing has emerged as a key area in limiting the negative social impact of the pandemic, with policymakers introducing measures to protect tenants and mortgage holders, such as support for payment moratoriums, suspension of evictions, or subsidies for rent and utility bills.

The pandemic highlighted some of the existing gaps in social protection systems. A lack of access can reduce their effectiveness in protecting people when they lose their jobs and income, fall sick or experience poverty. Typically, unemployment benefits and short-time work tend to be geared towards those on full-time permanent contracts. In contrast, non-standard workers, including the self-employed or those on part-time or fixed-term contracts, may lack adequate income protection and often face a higher risk of losing their jobs. Pre-crisis estimates suggest that non-standard workers are 40-50% less likely to receive income support during the periods they are out of work, and even if they do, the benefits tend to be less generous (OECD, 2019). Incentives for employers to use short-time work for non-standard staff are likely lower, particularly if firms expect some of the impact on employment to be permanent (see analysis in Chapter 2).

The prevalence of non-standard work differs across EU countries but is particularly frequent in certain sectors hit hard by the pandemic, such as hotels and restaurants or the arts and entertainment. Challenges for social policy mount in countries in which employment in these sectors is higher and non-standard employment more prevalent. Several Southern European countries appear to have a particularly high share of vulnerable workers (Figure C.1, upper-right quadrant). By socio-demographic group, women and younger workers seem more vulnerable and have a higher probability of being non-standard workers. Moreover, informal workers are a particularly vulnerable group with few entitlements and often have limited scope for claiming benefits.

Figure C.1

Total employment and non-standard employment in activities most affected by the pandemic

Source: OECD (2020a), OECD Annual National Accounts; EU Labour Force Survey Database; and OECD calculations, EIB Economics Department.

Note: Black lines indicate the EU average. Non-standard workers include those on temporary contracts or in part-time jobs, and the self-employed. Activities affected most by containment measures include wholesale and retail trade, accommodation and food services, real estate services and construction, professional service activities, other service activities and the arts, entertainment and recreation. See OECD (2020a) for further explanation.

Strengthening non-standard workers’ access to regular benefits and facilitating their inclusion in short-term work schemes have been a feature of COVID-19 policy responses, as a result of the spotlight cast by the pandemic on the existing gaps. Some countries have introduced special sectoral support and/or targeted measures for vulnerable groups. In Spain, for example, temporary workers whose contracts expired during lockdown before they reached the minimum contribution period for unemployment benefits received provisional allowances (ECIJA, 2020). Moreover, several countries have acted to support freelance workers and the self-employed. Relatively few actions have focused on informal workers (Table C.1).

Table C.1

Support for non-standard and vulnerable workers in the pandemic: Income replacement and support measures in EU Member States

Source: OECD (2020a).

Note: ¹ Includes lump sum or temporary income replacement schemes; ² access relative to standard workers assessed on the basis of the gap in the probability of benefit accessibility.

The pandemic is affecting social protection systems in the short term and may have long-term effects. Some of the measures introduced to protect workers are temporary, such as support for the self-employed via lump sum transfers, “employer salaries” or sectoral aid packages (such as for hospitality and the arts and entertainment). Other changes, for example improved access to benefits for temporary or part-time workers, might become permanent. They could be a step towards a gradual “update” of social protection systems to respond to more structural shifts in employment patterns linked to factors including developments following the global financial crisis and digitalisation. Closing some gaps could help to address the issue of rising inequalities that predated the pandemic, and prevent a further widening in its aftermath.

For housing, measures such as eviction suspensions or payment moratoriums are temporary and geared towards protecting vulnerable parts of the population. However, the pandemic has increased awareness of imbalances in this area. Inequalities in access to affordable, quality housing have widened in recent years, with rising housing costs contributing to the financial vulnerability of many households. Demand for housing is widely expected to receive a structural boost from the pandemic. Against this background, housing policy measures aiming to improve supply and guarantee well-functioning housing markets remain a key area for addressing inequalities.

Box D

How significant are the benefits of short-time working schemes for firms?

Participation in short-time work (STW) increased sharply as economic activity collapsed in the second quarter of 2020. STW schemes are part of a series of measures that provide support to firms (such as grants, equity injections, and loan guarantees) and households. At the end of May 2020, about one-third of employees participated in STW schemes in Austria, France and the Netherlands, and one-fifth in Germany, Spain and Ireland (OECD, 2020c). As economies recovered, participation declined (Figure D.1).

Figure D.1

Participation in short-time working schemes peaked during the lockdowns, percentage of employees

Source: For total employment (2019), OECD (2020b). Country-specific sources are Nombre de salaries effectivement places en activité partielle; DARES (2020), Situation sur le marché du travail durant la crise sanitaire au 29 septembre 2020 for France; Empfänger von Kurzarbeitergeld, Bundesagentur für Arbeit (2020), Monatsbericht zum Arbeits- und Ausbildungsmarkt, September for Germany; Personas incluidas en un Expediente de Regulación Temporal de Empleo (ERTE), end of month, Gobierno de Espana (2020), Afliliacion a al seguridad social, Balance mensual de la afiliación, 2 October for Spain; N. salariali Covid-19 erogate direttamente dall’INPS (CIGO, fondi di solidarieta, CIGD), Instituto Nazionale Previdenza Sociale (2020): “Integrazioni salariali Covid-19 erogate direttamente da INPS,” 1 ottobre for Italy.

The benefit that a firm derives from an STW scheme depends on how it would have behaved had the scheme not been offered. A key question is whether a firm only retained staff because it participated in the scheme or whether it would have retained the staff anyway. One factor influencing a firm’s response is the availability and cost of other mechanisms for adjusting its payroll. A firm operating under stringent employment protection laws and with contracts allowing it to adjust the number of employee hours might have retained staff even in the absence of the STW scheme. The same might be true of a firm employing highly skilled staff that are expensive to re-hire.

The evidence for firms’ response to STW schemes is mixed.[3] At the macroeconomic level, STW schemes appear to have helped avoid layoffs by increasing flexibility in the number of hours worked (Abraham and Houseman, 1994; Arpaia et al., 2010). From a microeconomic perspective, the effect of STW schemes is more difficult to demonstrate, not least because firms that have other ways of adjusting their payroll are less likely to adopt STW schemes (see Lydon et al., 2019 for evidence). For example, Kruppe and Scholz (2014) find that German firms participating in STW schemes during the 2007-2009 crisis reduced their headcount by about the same amount as those not participating. Against this background, we discuss the benefit of STW schemes for two scenarios representing firms at the opposite ends of the spectrum.

For firms that participate in the STW scheme but would have retained and paid in full their employees even in the absence of the scheme, the benefit is equal to the scheme’s transfers. A rough estimate of these transfers is the share of wages replaced by the STW schemes. This varies by country. For most, it is around 50% to 80% of the wages that employees lose because their working hours are reduced (Mueller and Schulten, 2020). The transfer is also reflected in institutional sector accounts. The drop in employee compensation raised entrepreneurial income growth in the second quarter of 2020 even more than during the financial crisis in 2009 (Figure D.2).

Figure D.2

Falling employee compensation added to entrepreneurial income

Source: Eurostat and EIB staff calculations.

For firms that would have laid off staff without the scheme, the benefit is about equal to the frictional costs of firing existing employees and hiring replacements once demand picks up again. Assume that if the firm had laid off staff, its salary payment would have fallen by the same amount that it receives in transfers when participating in the STW scheme and retaining its staff. In that case, participation in the scheme only saves the costs associated with firing and re-hiring employees. These costs, however, can be substantial. Estimates come in at about half of a worker’s annual salary, with significant variations across jobs and countries. Firing costs are typically in the range of one to five months of salary for OECD countries, depending on job tenure and the circumstances of dismissal (OECD, 2020b). Hiring costs, for recruitment and training, greatly depend on the position to be filled. Muehlemann et al. (2016) find that hiring costs are about two months’ salary for skilled German workers, while Blatter et al. (2012) estimate the costs at about three to four months’ salary for skilled Swiss workers, ranging from about one month for a medical assistant to six months for an automation technician. The bulk of these costs are associated with training (see also Manning, 2011, for an overview).

Aside from these direct effects, STW schemes are likely to generate indirect benefits for firms by stimulating aggregate demand. Like other schemes that insure against a sudden decline in income, STW schemes transfer funds to cash-constrained firms and households, whose marginal propensity to spend is likely to be higher than that of those funding the transfers. As a result, aggregate demand is likely to fall less than without the scheme.

Relative to the 2008-2009 recession, the benefits firms derived from STW schemes in the current crisis increased because the schemes were more generous. As a result, take-up has been much higher during the COVID-19 crisis than the 1% to 3% of employees observed in most EU countries in 2009 (Hijzen and Venn, 2011 and European Network of Public Employment Services, 2020). Indeed, a few countries, such as the United Kingdom, introduced STW schemes only in 2020. The schemes were made more generous for several reasons. First, economic activity collapsed as lockdowns were imposed, leaving firms with no time to prepare. In contrast, the 2007-2008 global financial crisis reached its peak with the insolvency of Lehman Brothers in September 2008 and only gradually started to affect real economic activity over the following six months. Second, uncertainty about the depth of the economic crisis was considerably higher in 2020 (Figure D.3). This greater uncertainty has increased the option value of temporarily supporting firms that might become profitable again after the crisis subsides. Third, in many EU countries the decline in output has been more broadly spread out during the COVID-19 crisis than in 2009, when the service sector fared better than construction and manufacturing (Figure D.4). The risk that STW schemes discourage workers from finding jobs that are more productive in other sectors therefore appeared smaller than in 2009.

Figure D.3

Standard deviations of consensus forecasts of euro area GDP growth in 2009 and 2020

Source: Consensus Economic Forecasts.

Note: Forecasts were made in the month shown and were for the annual GDP growth in 2009 and 2020, respectively.

Over time, the unintended effects of STW schemes may become more apparent. As countries emerged from lockdowns over the summer, participation in STW schemes declined. With the health crisis continuing, however, a number of countries extended their schemes (including Germany, France and the Netherlands). This raises the risk that in some sectors, firms that continue to participate in STW schemes might become unviable because demand for their products has declined permanently. For example, demand for office space and public transport may not fully recover. In addition, the cost of discouraging workers from finding jobs that are more productive may soon increase.

Figure D.4

Euro area GDP declined more sharply during the pandemic than in 2009

Source: ECB data warehouse.

Schemes may therefore need to be recalibrated to contain their unintended effects, and they must continue to reflect the institutional and market environment of the various countries, as well as the unfurling of the health crisis. In general, directing the STW schemes towards the sectors worst hit by government measures and promoting the mobility of workers from subsidised to unsubsidised jobs could help mitigate the schemes’ unintended effects.[4]