Via Wolf Street

45 million people have been furloughed in Germany, the UK, France, Italy, and Spain, but the “unemployment” rate barely budged because furloughs don’t count. Creating government-subsidized zombie companies & zombie jobs?

By Nick Corbishley, for WOLF STREET:

Unemployment in the EU has barely budged since the virus crisis began. In the first four months of the crisis, the official unemployment rate edged up from 6.5% in March, when many lockdowns began, to 7.1% in June, the last month on record. There’s one reason: Furloughed workers are not included in the unemployment stats:

Most EU countries have adopted hugely ambitious job retention programs that have saved, at least temporarily, tens of millions of jobs. Each government pays companies, who in turn pay employees between 60% and 84% of their monthly wage. In some countries, such as Germany and France, most furloughed employees work reduced hours for reduced pay. In others, such as Spain and the UK, most of the furloughed workers don’t work at all, at least until their job comes back.

Either way, the workers take a hit to their income but their jobs remain intact, at least for the duration of the program, and the government pays much of the costs, giving their employers time and financial breathing space to reinvent themselves for the new economic reality that is quickly taking shape.

In Germany, the UK, France, Italy, and Spain, a combined 45 million workers were registered in furlough programs at the end of May — compared to about 32 million Americans who are claiming unemployment benefits under state and federal programs. The initial duration of the programs differed significantly by country, from nine weeks in Italy to a year in Germany. But governments have begun to extend the duration of the programs.

The hope is that the economic fallout from the virus crisis will gradually dissipate, allowing many of the furloughed workers to return to their still-existent jobs, as happened in Germany during the Global Financial Crisis. Thanks to Berlin’s “Kurzarbeit” social insurance program, whereby employers reduce their employees’ working hours instead of laying them off, picking up government subsidies in the process, Germany experienced only a modest increase in unemployment, despite having suffered a 6% contraction in GDP.

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But this time, the challenge is many orders of magnitude bigger and more complex. Back in 2009, just under 1.5 million workers in the country were furloughed — compared to approximately 10 million workers that applied for the program in March and April this year. In May, as the economy began to reopen, the number fell to 7.3 million, and then to 6.7 million in June.

“The decline is quite slow, and in some sectors short-time work is even increasing,” said Sebastian Link, a labor market expert at the IFO. “Furloughs among metal industry workers, for instance, jumped to 48% in June from 40% in May.”

Normally, Kurzarbeit is restricted to 12 months but it has been lengthened to 21 months since the coronavirus crisis began. Politicians across Europe have sought to do the same with their respective furlough programs.

Italy and Spain’s furlough programs were supposed to end in the coming weeks, but last week they were extended to the end of December. In both countries, public debt is already soaring — the result of three simultaneous processes: massive growth in government spending to counter the virus crisis, a dizzying slump in tax revenues, and a sharp decline in GDP. But if millions of jobs were destroyed this Autumn and hundreds of thousands of companies hit the wall, the tax revenues and GDP would shrink even faster while defaults on bank loans would soar.

Surely it would be better, so the thinking goes, to extend the program, and that way forestall an immediate crisis for households and consumer spending. As Spain’s Work Minister Yolanda Díaz told the Financial Times: “It would not make sense to undertake this gigantic, unprecedented effort in the Spanish economy [to preserve jobs] and then just let things fall away.”

Once Spain’s job retention program ends, workers will have to return to their jobs, at least for the same length of time that they were furloughed. But many revenue-starved companies are not yet ready to bring back workers and recommence paying their salaries for months on end. Most would collapse straight into bankruptcy, which would be a nightmare for a country whose unemployment rate is already 15.6% — higher than anywhere in Europe bar Greece — and where one million jobs have been destroyed since March, even with the furlough program.

In France, more workers have been furloughed than anywhere else, with the exception of Italy. By mid-May, 12.4 million people — 43% of the entire workforce — had applied for the government’s “temporary unemployment” program. Since then, the number of people on the program has fallen, though it’s not clear by how much. The government has pledged to maintain the “temporary” program for up to two years, while gradually reducing the provisions.

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In the UK, 9.6 million jobs have been furloughed. Under the UK program, businesses can claim 80% of a staff member’s regular monthly salary, up to a maximum of £2,500. The money must be passed on to the employee and can also be topped up by the employer.

But as in the other countries, furloughed workers don’t count as unemployed, and the official unemployment rate has barely budged:

The government has already begun scaling back the program’s provisions and is scheduled to scrap the program altogether at the end of October. Unlike most of its European counterparts, the British government sees little sense in keeping workers in so-called “unproductive jobs” any longer than strictly necessary. The Bank of England appears to be of the same opinion.

“It’s been a very successful scheme, but [the Chancellor of Exchequer] is right to say we have to look forward now,” said Bank of England governor Andrew Bailey. “I don’t think we should be locking the economy down in a state that it pre-existed in.”

Bailey believes that some parts of the economy — notably those with “a high social consumption element”, where people work or consume in close quarters, such as in the hospitality sector — “will no longer be viable” in the post-lockdown reality. And it seems that both the government and the BoE accept that many of those jobs and some businesses that provide them will disappear.

With roughly one in four UK workers still furloughed — many in sectors with intense social interaction, such as food and accommodation — at a time that the number of job vacancies has collapsed to its lowest level since records began 20 years ago, it’s a massive gamble. The BoE believes that unemployment could almost double by the end of the year, to 7.5% from 3.9% today. That could prove to be optimistic. The OECD has warned that it’s likely to be closer to 11.7%, the highest level since 1984 when it reached 11.9%.

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But the alternative — i.e., extending job retention programs indefinitely, in the hope that the economic outlook will change at some point — is also riddled with risks, including fraud. An internal audit conducted by the French government has revealed that 700 out of 25,000 companies investigated were suspected of engaging in fraud. That’s the equivalent of one out of every 36. In Italy, the problem is likely to be far worse. By some estimates, as much as 10% of furlough pay in Europe is lost to fraud.

An even bigger risk is that the job retention programs help to keep alive companies that were already on their last legs before the coronavirus crisis began. As the OECD recently cautioned, while the furlough schemes have helped to safeguard millions of jobs, at least temporarily, extending them further risks creating — at huge cost, especially in countries with limited fiscal space — a whole new generation of government-subsidized zombie companies and zombie jobs. When it comes to creating zombie companies, Europe is already in a league of its own. By Nick Corbishley, for WOLF STREET.

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