Europe’s Virus Aid Stems Mass Jobs Destruction in Labor Shock

(Bloomberg) --

Jobless claims across Europe have surged under widespread lockdowns of economies, but the devastation pales in comparison with the shock to the U.S. labor market from the coronavirus.

Programs that are keeping more than 45 million workers on payrolls that might otherwise have been laid off mean euro-area unemployment rate ticked up only to 7.3% in April from 7.1% in March. In contrast, U.S. figures on Friday are forecast to show the jobless rate rising to almost 20%.

Europe's safety nets are so far preventing the kind of a joblessness hammering the U.S., where traditionally more flexible labor markets mean workers take the brunt. But the longer economies run below normal capacity, the greater the chance that businesses will go under, and temporary job losses become permanent. A slow recovery from the virus-induced recession increases that threat, and many economists expect Europe's jobless rate to push above 10% by the end of the year.

In Germany, the crisis has cost more than 600,000 people their jobs in the past two months. The increase -- though bad -- has to be set against the impact of a government program that's estimated to have protected more than 7 million workers.

The picture has been echoed across Europe after governments threw billions of euros into support measures. Those were aimed at preventing mass layoffs, which would have slowed the recovery and left even deeper scars on societies.

“The short-time work schemes absorb a lot of the immediate impact of the crisis on the labor market, but also masks the job losses that are likely still up ahead,” said Bert Colijn, an economist at ING in Amsterdam “As the recovery is likely going to last for quite some time, unemployment is set to rise significantly although short-time work will help output to recover more quickly once demand returns.”

In Italy, JPMorgan Chase estimates about 12.5 million people have tapped a support program. It says that would mean an unemployment rate of close to 60% if all those workers were counted as unemployed in the month.

Spanish jobless claims have jumped by more than 600,000 since March, but five times as many are on a subsidized temporary layoff scheme. The U.K.'s program covers about 8.7 million jobs.

EUROPE INSIGHT: Back to School, Back to Work – Labor Arithmetic

Countries have now eased many of the restrictions implemented to contain the virus, but it's slow progress. A business activity survey on Wednesday showed euro-area manufacturing and services shrank sharply again in May and employment declined.

IHS Markit, which compiles the activity survey, said even with companies taking advantage of furlough schemes, the net fall in euro-zone employment “remained severe and amongst the greatest in the survey history.”

“The elephant in the room is the basic economic principle of demand,” said Robert Alster from Close Brothers Asset Management in London. Without a recovery, Europe “may find itself in this uncomfortable position for some time to come.”

What Bloomberg's Economists Say...
“We estimate that 10% of Europe's labor supply could be unlocked as schools and nurseries reopen. Whether that translates into a 10% boost to economic activity will depend on whether parents feel it's safe to send their children back to school and they have jobs to return to. The key point is that it will be impossible for the European economy to return to anything like normal unless schools and childcare facilities reopen successfully.”
--Jamie Rush and Maeva Cousin, Bloomberg Economics.
Read the full INSIGHT