Europe’s Aversion to Hiring-and-Firing Suddenly Seems Smart Idea
Europe’s Labor Market Better Placed to Face Virus Than U.S.
(Bloomberg) -- Continental Europe’s labor-market model is experiencing rare praise from economists because it may help prevent massive job losses during the coronavirus pandemic.
While widespread layoffs are feared in the U.S., analysts don’t expect the same fallout in euro-area employment, where rules often make it harder for companies to fire workers, and also encourage their retention during a crisis. Such regulations are sometimes cited as a brake on growth, but the outbreak is suddenly revealing their virtues.
“The European labor-market model -- which has well-known drawbacks in coping with structural change -- is more robust than its American counterpart to large but temporary shocks such as the coronacrisis,” Goldman Sachs Group Inc. economist Jan Hatzius wrote in a note this week.
Germany, France and Italy -- which between them make up almost two thirds of the euro-zone economy -- all have existing furlough measures that allow workers to receive a salary while temporarily suspended from their jobs. Those countries have responded to the crisis by bolstering those programs, pledging billions of euros to include a greater number of employees and support their pay.
“I’ve got a message for businesses: If you have any difficulties, don’t fire people,” France Labor Minister Muriel Penicaud said last week on French television BFM TV. “Our recovery will be faster and stronger if you don’t.”
Germany also embraces that approach. Economy Minister Peter Altmaier has said that the government’s top goal must be to reduce uncertainty, and “no healthy company should go bankrupt because of coronavirus, no job should be lost.”
Countries from the U.S. to the U.K. meanwhile are racing to create labor market responses, often from scratch, to try to cushion the blow from the virus for workers, in the hope that a temporary disruption doesn’t morph into permanent economic damage.
Diverging increases in unemployment will soon become apparent, according to Goldman Sachs’s Hatzius. He predicts a 5.5 percentage-point increase in joblessness in the U.S., but less than half that in Germany, which has a long-existing measure to furlough workers.
“It’s exactly the type of program we need right now,” said Laurence Ales, an economics professor at Carnegie Mellon University in Pittsburgh, Pennsylvania. “The usual critique of furlough programs is that it hinders workers from seeking alternative employment. But now we are in lockdown, you’re not going to go out and seek another job.”
The U.S. economy still remains an example of resilience and potency.
After the pandemic passes, for instance, economists expect a stronger economic snapback there than in Europe. Bloomberg Economics forecasts the U.S. to shrink 0.5% in 2020, a much smaller contraction than the 2% it sees in the euro area.
GLOBAL INSIGHT: Recession? Definitely. Recovery? Maybe
Economists have long cited a lack of labor-market flexibility in Europe as one reason why its economy is less dynamic than that of the U.S.. It often features as an area for improvement mentioned by officials from the region’s own economic institutions.
In a recent report on global competitiveness, the World Economic Forum ranked the U.S. 3rd for flexibility of its labor market. Germany was 18th, France was 35th and Spain 58th.
But what’s normally perceived as a weakness is currently being touted, with some justification, as a strength by the region’s officials, and is a key pillar of their crisis response.
France has simplified the process for companies to get state financing for idled staff, and has also lifted a cap on salaries. Italy has significantly expanded its own program to allow previously excluded companies with fewer than five staff.
Germany’s government has made furlough payments available to temporary employees, and cut requirements for how much of a company’s workforce must be affected before it can apply for wage subsidies. The labor agency registered 76,700 applications for furlough at the end of last week, and the government expects around 2.2 million people to be affected this year, according to German newspaper Handelsblatt.
Spanish staff who are temporarily suspended receive unemployment insurance. The government is trying to encourage companies to suspend workers -- rather than fire them -- by reducing some of the costs to idle staff, a move that unions support.
“We’re trying to diminish -- mitigate as much as possible -- the impact of the crisis,” said Jaime Cedrun, head of the Workers’ Commission, a major Spanish union, in the Madrid region. “We hope we recover output as soon as possible.”
However the country may still see a spike in unemployment because it has a particularly high tally of workers on short-term, temporary contracts, many in tourism. And if the pandemic lasts longer than expected, Europe’s companies and governments will be forced to consider whether they can bolster furlough programs even more.
Ricard Escrich is one of the luckier Spaniards.
He works in Barcelona assembling cars for Volkswagen Group’s SEAT unit, and is one of more than 1 million workers that Spanish unions expect to be furloughed in coming weeks, in just the kind of scheme that the continent’s politicians are counting on companies to adopt.
While the 48-year-old is receiving nearly the full amount of his salary while he’s not working, he’s still uncertain about the future.
“When the pandemic passes, when are we going to get back to the level of car sales we had before?” he said, noting that during the 2008 crisis only some production lines were closed, but this time, the whole factory is shut. “When you think about it, it’s a bit scary.”
©2020 Bloomberg L.P.