WHEN THE coronavirus struck Europe in March, forcing businesses to shut their doors and workers to stay at home, lawmakers had two options for limiting the economic fallout. They could support workers directly by temporarily beefing up unemployment benefits, and hope that laid-off workers would eventually find new jobs. Or they could pay firms to keep employees on the books, at least for a while, to help prevent lay-offs in the first place. Most governments chose the latter.
For the moment, it seems they made the right choice. Unlike America, where the unemployment rolls have swollen by 20m and the jobless rate has soared to 13.3%, European countries have avoided mass lay-offs. Instead, more than 40m workers have enrolled in short-term furlough schemes, modelled on Germany’s Kurzarbeit programme, in which governments pay workers 60-85% of their wages to work reduced hours or none at all. In Britain, France, Germany, Italy and Spain, such programmes now cover a third of the workforce. The hope is that this will speed up the recovery. When lockdowns are fully lifted, relationships between workers and employers will still be intact, and businesses can pick up where they left off.
But such schemes only alleviate pain in the short term. Unemployment will inevitably rise once they are phased out. If kept too long—France is reportedly planning a new scheme that could last as long as two years—they may interfere with the necessary reallocation of resources from failing firms to successful ones. A recent study by Allianz, a big German insurer, estimates that 9m workers—a fifth of those currently enrolled in job-subsidy schemes across the five largest European countries—are employed in “zombie jobs” in industries that will continue to struggle during the pandemic, including travel, tourism, hospitality, entertainment, and retail.
Once job-protection measures end, lay-offs could begin in earnest. If all of these zombie jobs simply disappeared, European unemployment rates would be much higher (see chart). As governments decide how long to extend their support schemes, they must also look at ways to help workers find new roles. Otherwise, they risk pouring public money into dying business, making it even harder to revive their economies.