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5 June 2020

Why is the unemployment rate so much higher in the US than the EU?

Differences in working culture and government responses have created a sharp divide. Which way will the UK go?

By Nicu Calcea

It is one of the most famous charts of the coronavirus crisis: a simple bar chart in The New York Times showing unemployment claims soaring to levels that can barely be contained on the front page. In the United States, the unemployment rate jumped from 3.6 per cent in April 2019 to 14.7 per cent a year later. But in European countries — even those hard hit by the virus — it has nudged rather than broken the dial.

In Germany, for example, the unemployment rate in April was 3.5 per cent, up from 3.1 per cent in April last year. France saw a year-on-year bump of 0.2 percentage points in April; Spain was up by 0.6 points.

Overall, unemployment in the EU and the eurozone are both lower in April 2020 than they were in April 2019. Both have registered only a small uptick from March to April this year.

The chart below shows just how sharp the divide between the United States and the European Union has become.

US unemployment rate overshoots that of the EU

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This divide may be getting even larger. While the figures for May — and later months — will likely show rising unemployment in Europe, the US may see a faster rise. Goldman Sachs estimates that the American unemployment rate will peak at 25 per cent in the second quarter of the year.

The numbers reveal just how differently the US and Europe approach employment.

Two different models

European countries generally make it much more difficult to fire workers compared to the US, which experts believe makes the entire system more protected from crises such as the Covid-19 pandemic.

“Germany and Denmark have fended off a rise of unemployment by subsidising firms to furlough their employees — so that the employees could go on receiving their paychecks while waiting out the pandemic at home,” explains Edmund Phelps, the winner of the 2006 Nobel Prize in Economics and Director of the Center on Capitalism and Society at Columbia University.

“In contrast, France and Spain, which have not adopted that method, have experienced a sharp rise of unemployment. The US, which also did not adopt that measure, shows a huge rise of unemployment.”

Several European governments have deployed furlough schemes that allow workers to keep their jobs and continue to be paid while being temporarily suspended from work. Germany, for example, covers up to 67 per cent of workers salaries while the UK covers up to 80 per cent.

The hope is that furloughing workers will allow businesses to jump back to normal activity as soon as lockdown restrictions are lifted.

The US strategy, on the other hand, was to channel most of its efforts through the $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act.

The scheme consists of three main parts: $500 billion paid directly to workers, $208 billion loaned to big businesses and $300 billion loaned to small businesses.

The American scheme is focused on supporting individuals and businesses, rather than on saving jobs. Or as Phelps puts it: “The US largely threw money at the problem — and it was too late at that.”

Josh Bivens, director of research at the Economic Policy Institute, thinks the American approach — combined with a blunt public health response that has had less success in “flattening the curve” of new cases — means the US will ultimately take a bigger economic hit once the pandemic subsides.

“My guess is that by summer it will be clear that the US drop in GDP is larger than in most European countries,” he says. “We have been generally less effective in managing the public health response with anything but mass shutdowns. Our caseloads are declining very slowly relative to, say, the trajectory of Spain or Italy, and I think this will greatly drag on our economic recovery relative to theirs.”

Which way will the UK go?

The UK is yet to release unemployment statistics for March and April, with new figures set to be released on 16 June.

What we do know is that the number of unemployment claims increased by 70 per cent in April, the largest jump the Department of Work & Pensions has ever recorded.

While the figures don’t directly reflect unemployment, as they include some of the self-employed and furloughed employees that are eligible for Universal Credit, they do suggest that workers in the UK have been struggling.

While the gap between the EU and US is stark, furloughing is not a magic bullet which will inevitably protect jobs in the long as well as short term. Around a quarter of UK workers are now placed on furlough — and while these workers are still being paid, their wages have been reduced and many will lose their jobs once the scheme ends in October. 

The number of vacancies has also halved, meaning those without a job will find it even more difficult to find one.

The Bank of England expects unemployment to rise to 9 per cent as a result of the coronavirus crisis before falling back to normal levels by 2022.

In a Treasury Committee hearing on Wednesday, former Chancellor of the Exchequer Alistair Darling confirmed that the UK might need to deal with an unemployment wave once the furlough scheme starts being phased out.

“We need to get ourselves into the frame of mind where we’re thinking about 1980s levels of unemployment,” he said.

What’s next?

The coronavirus crisis will test economies across the world in unprecedented ways. This makes it difficult to predict the evolution of employment figures — and in any case those figures don’t tell the whole story.

Take, for example, the case of Italy. Contrary to analysts’ expectations, the unemployment rate in Italy has dropped by a large margin instead of rising.

Why? Because unemployment rates measure the proportion of economically active adults searching for jobs, rather than the overall proportion of those unemployed. Italy’s unusual evolution indicates that Italians have largely given up their search for a job.

How things will progress largely depends on the way workers will be supported once the unemployment insurance money runs out.

“My guess is that the huge US spike in unemployment likely overstates the welfare cost of the recession relative to Europe, mostly because the US has temporarily greatly enhanced the generosity of its unemployment insurance benefits,” says Bivens.

“But once the enhanced unemployment insurance benefits run out in the US, then these differences in unemployment will start to reflect differences in welfare across countries.”

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