BlackRock Investment Institute

Macro insights

Policy makers seek to curtail coronavirus jobs hit

Labor market resilience will be crucial to how quickly economies bounce back from the coronavirus shock. Early indications point to a surge in the number of unemployed as a result of coronavirus containment measures. OECD data show that countries with short-shift work programs managed to keep more workers in jobs during the global financial crisis (GFC) – see the chart below – and many similar programs are now being put in place across developed markets.

Permanent employment vs output in OECD countries, Q3 2008 to Q3 2009

Source: BlackRock Investment Institute, with data from the OECD, April 2020. Notes: The chart shows the percentage change in permanent employment and economic output for OECD countries between Q3 2008 and Q3 2009. The countries have been divided into those with short-shift work programs going in to the GFC, those which implemented new short-shift work programs and those which didn’t implement short-time work programs.

Policy makers hope to avoid the long-term labor market scarring of the kind experienced in the GFC, with sluggishly high rates of unemployment and underemployment – where workers would have liked to work longer hours but couldn’t find the jobs. One lesson from the GFC is that policies that enable workers to remain in their jobs – even if working fewer hours – lead to much better labor market outcomes. These short-shift policies – where workers reduced their average working hours and were compensated by the government for part of their lost income – were popular with many European economies such as Germany and Italy. Research by the OECD found that both employment and average working hours fell with the drop in output during the financial crisis. Yet the countries with either existing or new short-shift policies fared better than those without in terms of change in permanent employment. Countries with existing measures suffered much smaller average declines in permanent employment. Instead, the short-shift policies enabled firms to adjust by reducing their workers’ average hours by much more than in other economies.

This provides context for the fiscal packages that we have seen proposed over the past three weeks. For example, the German short-shift program is expected to attract 2.5 million new participants, versus a peak of 1.5 million during the GFC. The UK has offered to guarantee up to 80% of wages for employees in affected sectors, subject to an overall monthly cap. In the U.S., the coronavirus stimulus bill includes a 50% payroll tax credit on wages of up to $10,000 to help disrupted employers keep employees on the books. And today the European Commission proposed a new state-supported short-shift work program to help people keep their jobs.

But we do not expect labour markets to return straight to their pre-shock state once the coronavirus disruption starts to resolve. The U.S. labor market was already showing signs of overheating before the shock, so a return to a 3.5% unemployment rate looks unlikely. That level was far below the 4.4% non-accelerating inflation rate of unemployment (NAIRU) estimated by the Congressional Budget Office.

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