Europe and China are outpacing the U.S. in shoring up their labor markets amid the historic fallout from the coronavirus pandemic, according to economists.
U.S. unemployment figures published last week showed that an unprecedented total of 3.28 million Americans had filed unemployment claims during the week ending March 21, as the true extent of the impact from nationwide shutdowns became startlingly apparent.
"While the near-term drop in output may be similar on both sides of the Atlantic, unemployment will likely surge by less in Europe where generous employment subsidies encourage labour hoarding in a crisis, thereby reducing the number of near-term job losses," Berenberg projected in a note Friday.
Chief Economist Holger Schmieding, Senior Economist Kallum Pickering and European Economist Florian Hense said that one of the lessons learned from the global financial crisis in 2008 was that targeted support for under- or unemployment can limit the number of dismissals, even in the event of a sharp economic downturn.
"Partly due to Germany's 'Kurzarbeitergeld' subsidy for reduced working hours, German employment fell by just 1% during the GFC of 2008/09, despite a 7% peak-to-trough plunge in real GDP (gross domestic product). In the U.S., where output contracted by just 4%, employment fell by a much bigger 5.4%," the note highlighted.
Employment subsidies vs. labor hoarding
Berenberg calculations estimated that if German employment had responded to the country's fall in GDP to the same degree as U.S. employment did to the fall in its output, it would have declined by around 1.9 million jobs instead of a mere 400,000 in 2008.
In the past couple of weeks, Germany, the U.K., France and others have deployed some form of employment subsidy policy. In the U.K., for instance, companies will receive up to 80% of a furloughed employee's wages.
However, Berenberg economists characterized the U.S. policy response, aimed at encouraging "labor hoarding" through such initiatives as tax credits to firms which retain employees, as "less generous."
The latest German employment figures are due on Tuesday and are also expected to be eye-catching, but Schmieding anticipated that this could be down to the surge in people receiving the benefits of the subsidy scheme, rather than a marked rise in the number of unemployed.
As strict coronavirus lockdowns continue to decimate demand and supply, GDP contractions for the second quarter in most advanced economies look set to sharply exceed those seen during the financial crisis.
However, the more aggressive employment subsidies across Europe, Berenberg projected, will see euro zone unemployment rising from 7.4% to a peak of 10.0% this fall, while the U.S. is expected to surge from 3.5% in February to 11.6% in the second quarter before beginning a modest decline.
"By encouraging firms to retain their workers while authorities tackle the coronavirus medical emergency, Europe is increasing the likelihood that economic activity can get back to normal more quickly once the containment restrictions are lifted step by step," Berenberg concluded, contending that this approach also limits the risk of a protracted downturn caused by a more persistent shock to demand from high unemployment.
China hiring picks up
Hiring in Europe has diminished sharply as confirmed cases of the coronavirus across the continent continue to escalate, particularly in the worst affected countries such as Italy, Spain and France.
But in China, the original epicenter of the outbreak, hiring has begun to steadily pick up as new cases of the virus have supposedly slowed to a trickle, with industrial production reopening across the country, in contrast to the exponential growth seen elsewhere in the world.
"About two weeks after we saw hiring growth contract in China, it fell to a low of -45% year-on-year," LinkedIn Senior Economist Mariano Mamertino said in a research note Friday.
"Hiring has slowly started to rebound as containment of the virus takes effect, but it is still hovering at -24% year-on-year as people go back to work."
The U.S., Italy and Spain have now surpassed China's official case total with Spain also closing in, and the virus is continuing to spread. However, the accuracy of Beijing's coronavirus data has been called into question, particularly due to the lack of information about the number of tests available.
"With more than four times our population, roughly a two-month head start, and the great job it supposedly did, China must have at least 2 million test results, probably more," according to Derek Scissors, resident scholar at U.S. think tank the American Enterprise Institute (AEI).
"The details of these — symptoms, timing, demographics, recurrence — would be incredibly valuable to the world. Where are they?"