Global Daily – Europe’s hidden unemployment

by: Aline Schuiling

Euro Macro: Short-term work schemes still widely used after the end of lockdowns – Germany’s Ifo Institute and France’s DARES have published recent data on the use of short-term work schemes (STW). STW schemes are designed to allow companies to temporarily reduce the number of working hours of employees (often to zero) while keeping them on the payroll. The government reimburses the companies what they have paid to these employees, which often is around 70-80% of their normal hourly pay.

In Germany, the easing of lock-down measures since early May has resulted in a drop in the number of people working in STW (called Kurzarbeit) from a peak level of 7.3 million people in May, down to 4.6 million in August. As a share of total employment, the percentage of employees working in STW fell from a peak level of 21.7% in May, down to a still very high 14% in August.

In France, where the lockdown measures were stricter than in Germany and prohibited a larger share of employees from coming to the work place during the Covid-19 crisis, the number of people in STW (called acitivité partielle or chômage partiel) peaked at almost 9 million in April, and subsequently fell to 2.4 million in July. As a share of total employment it fell from more than a third of all employed persons in April, down to around 9% in July. France’s DARES also publishes the number of employees in STW in full time equivalents, which was equal to around 4% of employment in July. According to the statistical methodology used by the statistical bureaus in the eurozone all persons working in STW are registered as being employed.

Despite the wide use of STW employment in Germany as well as in France declined during the first two quarters of this year. In Germany almost 600 thousand jobs were lost in total (employment -1.3%) and in France almost 800 thousand jobs (employment -2.8%) between 2020Q2 and 2019Q4.

The break-down into sectors in Germany (August) as well as in France (July) shows that the share of STW in total employment per sector still is large in the services sector as well as in manufacturing. The sector with one of the highest shares of employees in STW is hospitality (in each country around 35% of all employees in the sector), which is no surprise as activity in this part of the economy still is depressed by social distancing measures and/or restrictions on international travel. However, large shares of STW can also still be found in car manufacturing (around 30% of employees in Germany and around 40% in France) and transport & storage (around 15% in Germany and around 20% in France). Finally, it is noteworthy that in Germany’s metal industry more than 40% of all employees were in STW in August and in mechanical engineering 31%.

The fact that STW schemes were still widely used in parts of Germany’s manufacturing sector that have neither been subject to strict lockdown measures nor are limited by social distancing or limitations to international travel, suggests that the use of the STW represents some hidden unemployment. This means that there is a high probability that part of these employees will lose their jobs after all in the coming months. Another source of hidden unemployment in the eurozone is employees that are actually unemployed but do not meet the strict definition (available for work and having actively looked for work in the last two weeks). Indeed, the broader U6 unemployment rate is extremely elevated. We return to this topic in coming publications. Meanwhile, the STW schemes in Germany and France will remain in place for a considerable time and can be used well into 2021. Although the use of STW limits the drop in employment and dampens the rise in unemployment, it does add to the overall level of slack in the labour market and, therefore, limits wage growth as well as underlying inflationary pressures. (Aline Schuiling)