Via Financial Times

Millions of workers on European employment protection schemes are at high risk of losing their jobs when support is withdrawn, highlighting the dilemma for governments as they extend or amend their public subsidies.

Employment subsidy programmes cover 45m jobs, or a third of the workforce, in Germany, France, Britain and Italy and Spain. They are credited with preventing Europe from suffering the type of catastrophic job losses that have hit the US since the coronavirus pandemic struck. 

Governments have mostly extended their schemes into the autumn, fearing that premature withdrawal of support could trigger mass job losses.

But as demand and output pick up, policymakers and analysts are weighing not only the vast public costs but also the risk that blanket subsidies could trap people in unviable “zombie” jobs and deter them from moving into sectors with better long-term prospects.

“Extending job protection will just postpone the problem,” said Katharina Utermöhl, senior economist at Allianz. A recent study by the insurer concluded that 9m jobs — or one-fifth of those enrolled in job protection schemes — were vulnerable because they were in sectors that would continue to struggle. These include tourism, travel, hospitality, retail and entertainment.

“It is really important to have other initiatives, such as active labour market policies,” Ms Utermöhl added.

While the OECD expects the eurozone unemployment rate to climb to 10 per cent by the end of June, this is still much lower than the US, where the jobless rate is forecast to reach 17.5 per cent by that time.

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Job losses are far higher in the US, with more than 45m new claims for unemployment insurance filed since mid-March. Although hiring picked up in May, Heidi Shierholz, ex-chief economist at the US Department of Labor, calculated that more than one in five US workers are still either on unemployment benefits or waiting to receive them.

But the majority of newly jobless are temporary lay-offs and could be swiftly rehired, so the unemployment picture could look quite similar on both sides of the Atlantic by the end of the year, according to OECD forecasts.

US policymakers have chosen mostly to support workers with more generous unemployment insurance benefits — with a federal supplement of $600 to state benefit levels — which means about two-thirds of workers are better off on benefits.

They now face the same challenge as EU counterparts: how to phase out support without huge hardship and a surge in long-term unemployment. “We can’t turn off federal relief too early,” said Ms Shierholz. Support should be tapered only when unemployment fell or employment rose to an appropriate level, she added.

In Europe, meanwhile, trade unions and employers are demanding that governments extend job protection schemes. Many have done so for the next few months, in some cases with employers sharing more of the cost.

But no big European economy has said how it plans to target job subsidies in specific sectors, create new hiring incentives or set up mass reskilling programmes. Such measures will be needed — shifting support from keeping workers in existing jobs to helping them find new ones — to avoid either mass job-losses or zombie jobs, economists say.

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The Spanish government is under particular pressure because its ERTE scheme runs out at the end of June. Talks of a three-month extension will resume this week with business and union organisations demanding a more generous approach from the government. Mindful of a rising public debt burden, ministers want employers to carry more of the cost.

Spanish officials say ERTE has worked, with 1m people returning to their jobs and bringing the total of employees covered down from 3.4m at the scheme’s peak to 2.4m. But, of the big European economies, Spain is likely to be hardest-hit by the jobs shakeout, with unemployment reaching 22 per cent by the end of September, according to OECD forecasts.

“It is very hard to know when to stop ERTEs,” said Toni Roldán, director of the Esade EcPol think-tank in Madrid. “It probably should be sector by sector. The most important thing there is flexibility, since companies know best the situation they are in.”

The UK has gone the furthest in tapering its job protection scheme. Although it will last until October, it is closed to new applicants and employers will progressively start sharing the costs from August, though employees will still receive 80 per cent of regular pay. Hard-hit sectors such as hospitality and tourism are to be treated the same as others.

The Allianz study found that the UK had the highest level of “zombie” employment at 7.6 per cent, or 2.5m jobs, suggesting mass job-losses to come. But the debate is now turning to how the government can support workers to find new roles — through retraining schemes, job guarantees for young people or direct job creation in state-funded infrastructure projects.

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France has one of the most generous and extensive job support schemes, which the government says will cost €31bn over six months. Almost 9m people were covered in April but that fell to below 8m in May, according to labour ministry estimates. The scheme will run until September.

Germany’s Kurzarbeit, or short-time work scheme — described by the IMF as the “gold standard” of protection programmes — will last in its enhanced emergency format until the end of the year but a standard scheme could run for up to 24 months.

With Germany’s economy up and running, and with the government injecting a further €130bn stimulus into the economy, there are some concerns that Berlin may be doing too much.

“Now we are in a situation where most activity can resume, you don’t want to pay people for not working,” said Moritz Kuhn, professor of economics at the University of Bonn. “It just distorts labour demand for employers.”