Employment is growing strongly in the euro zone
ADRESS THE Brussels Economic Forum in June, Ursula von der Leyen, President of the European Commission, drew up an optimistic assessment of the EUrecovery. She promised that “in 18 months, the 27 Member States will be back on track, out of the crisis”. But she noted that “it is no accident. This is the result of the political decisions we have taken since the very first days of the pandemic. A series of recent figures of strong production and employment indeed seem to justify this bold assertion. On August 23, the preliminary estimate of the Eurozone Purchasing Managers Index, a monthly business survey conducted by IHS Markit, suggested that employment in July and August will turn out to have grown at its fastest monthly rate in 21 years. This followed strong official data on production and employment the week before.
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Ms von der Leyen thanked European governments for preventing a sharp rise in unemployment during the crisis. The euro area experienced a much lower peak in unemployment than in the United States (see chart), mainly because governments quickly extended their national job retention programs. In Germany, for example, the terms of Kurzarbeit scheme, under which workers work fewer hours for lower pay to avoid layoffs, have been relaxed. Agency workers were included for the first time, and the government put in more money, offering to reimburse workers for at least 60% of lost wages and 100% of social insurance contributions. In Italy, restrictions on the size and type of enterprises eligible for public aid have been relaxed and the procedures for applying for aid have been simplified. An attempt to ban the layoffs, however, failed.
Yet unemployment data presents a false rosy picture of the euro area labor market, for two reasons. The first is that the participation rate fell sharply with the onset of the crisis and has not yet recovered. Unlike America, where more than half of the drop in participation reflects people retiring during the pandemic, the drop in Europe has been more evenly distributed and includes many young workers, who will almost certainly want to resume their jobs. job search in the future. In total, around 2.5 million fewer people are employed than at the end of 2019 and the vast majority of them are not classified as unemployed because they are not actively looking for work. In the most recent data, around half of the job shortages were in Spain and Italy, which historically have had serious problems creating jobs.
Millions of people who still use job retention programs are also considered employed for official statistics purposes. The European Central Bank recently estimated that around 5% of the workforce was still registered in May, or around 10 million more people. Some may be tempted to increase their hours over the next few months as schemes become less generous or even expire, as is expected to happen in late December in the larger four. EU savings. But others, especially seasonal workers, may find that there are no jobs available. There will undoubtedly be calls for extending programs, at least for the sectors most affected by the closures, such as retail, entertainment and hospitality.
Policy makers face a delicate balance. The extension of job retention schemes weighs more on public finances: the public debt of the euro zone recently exceeded 100% of GDP for the first time, against 86% at the start of the pandemic. But if schemes are wound up before demand for workers has recovered sufficiently, there is a risk of widespread long-term unemployment. Although euro area activity grew strongly over the summer, in the second quarter GDP was still 3% below its level at the end of 2019. By this point, it had already recovered in America (see graph).
European governments did well last year to ease the impact of lockdowns on their labor markets and will take comfort in this week’s numbers. The job market outlook looks much better than after the global financial crisis, when it took nine years for employment to return to 2008 levels. But millions of European workers still lack the opportunities job they had 18 months ago. It is too early to declare that the eurozone is back on track. ■
This article appeared in the Europe section of the print edition under the headline “Not Yet Out of the Woods”