Furloughed Jobs Disguise the Eurozone’s Employment Crisis

October 5, 2020 Updated: October 5, 2020

Commentary

The U.S. jobs recovery slowed slightly in September, but the employment recovery is still faster than in most comparable economies.

The jobs report showed a healthy 661,000 gain in nonfarm payrolls. Much of the difference with consensus came from shifts in government payrolls, which fell 216,000 in September. However, private payrolls rose by a healthy 877,000, as the unemployment rate fell to 7.9 percent.

In Europe, according to Eurostat, the unemployment rate increased to 7.4 percent in August, while in the euro area, it rose to 8.1 percent. However, more than 10 million workers remain in furloughed jobs, making a comparison with the United States, which doesn’t offer subsidized unemployment, a challenge.

In similar terms, the eurozone unemployment would be close to 11 percent if we used the same calculation as the United States. The Organization for Economic Co-operation and Development (OECD) estimates that unemployment will rise above 10 percent in the eurozone before year-end as furlough programs end.

Eurostat estimates that more than 15.6 million people in the EU and about 13.2 million in the euro area were unemployed in August. Compared with July, the number of unemployed increased by 238,000 in the EU and 251,000 in the euro area.

The furloughed jobs programs have been one of the most important policies implemented by the European nations in the COVID-19 crisis. They aim to protect jobs for a few months while businesses recover their activity. These plans were designed to allow companies to pass what was expected to be a short and almost painless crisis of two, maybe three, months. Now, many European nations face a double problem.

Many of the companies that signed up for these furloughed job programs face bankruptcy as the economic crisis has been longer and more damaging to the business fabric than governments expected. With almost one in five companies in Europe facing substantial losses and many close to bankruptcy, a significant part of these furloughed jobs will simply become full unemployment. In Germany, an economy that has recovered faster than all its European peers, around 3.7 million workers remain in these subsidized plans, after almost six months of reopening the economy.

In Germany, the government has also implemented a “bailout of everything” policy to keep the zombie businesses alive. According to the Financial Times, about 550,000 businesses in Germany are at risk of being considered zombies (unable to pay their interest expenses with operating profits). If the crisis remains for more months, as it seems, the cost of furloughed jobs will be unbearable for governments and the employment drama will unravel just at the time in which the insolvency issues start to appear in banks and companies.

Furloughed job plans only work as a temporary measure if strong policies to protect the business fabric and strengthen the private economy are implemented at the same time. Unfortunately, many governments in Europe, such as Spain’s, where unemployment is 16.2 percent even without counting furlough programs, have only used these programs to “hide” unemployment, and no significant measure has been implemented to help businesses thrive, attract capital, and strengthen job creation.

Many problems remain in Europe. The cost of creating a job is extremely high, with a high tax wedge on labor. Additionally, some of the tax and administrative burdens to business creation haven’t been lifted in this crisis. Finally, in many cases, populist governments have threatened investment and job creation instead of incentivizing capital attraction.

The European economy will find itself in a lost decade for employment if these burdens aren’t lifted. Furlough plans may have worked as a short-term disguise of the employment drama, but the crisis may be worse if countries don’t implement decisive labor market liberalization measures and strong tax incentives to rebuild and grow the business fabric.

Daniel Lacalle, Ph.D., is chief economist at hedge fund Tressis and author of “Freedom or Equality,” “Escape from the Central Bank Trap,” and “Life in the Financial Markets.”

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.