The Covid-19 pandemic shocked the world, leading to the largest economic downturn since the Great Depression.
The International Labour Organisation estimated that 225 million full-time workers lost their jobs during the pandemic, resulting in the loss of USD 3.7 trillion in income.
Western Europe and the United States were among the regions most severely affected by the high economic and human costs of the pandemic. Governments on both sides of the Atlantic enacted bold policies to support their citizens.
The U.S. expanded existing unemployment insurance to support workers who lost their jobs, while advanced economies in Europe implemented proven job retention and furlough schemes.
“In general, I think our universal income-based model was more efficient in targeting aid to those who needed it most, while the furlough model preserved employer-employee connections and led to fewer displacements,” says Harry Holzer, a professor of public policy at Georgetown University.
In general, I think our universal income-based model was more efficient in targeting aid to those who needed it most, while the furlough model preserved employer-employee connections and led to fewer displacements.
Werner Eichhorst, the Coordinator of Labour Market and Social Policy in Europe at the Institute of Labour Economics in Bonn, Germany, says the U.S. and European governments each implemented policies best suited to existing labour market structures.
“The U.S. labour market is quite different from the many diverse European labour markets,” he says, adding that a massive job retention scheme would have been infeasible in the U.S. because none of the associated infrastructure or bureaucracy existed before the pandemic as they did in Europe.
Indeed, the Paycheck Protection Program, an attempted job retention scheme, bore mixed results. Economists found that the loans did not always go where they were most needed but did help the labour market recovery.
Instead, the U.S. mostly provided direct income support through stimulus checks and expanded unemployment insurance, with some low-wage workers receiving more than 100% of their weekly salary.
“A wage subsidy scheme is easier because you don't have to take into account individual employment relationships,” says Eichhorst.
U.S. Department of Treasury economists partially attributed the expanded unemployment insurance to the country’s historic economic recovery.
The U.S. recorded a significantly lower post-pandemic GDP shortfall than the EU and other G7 countries. The country’s 3.6% unemployment rate in July 2022 nearly matched the record lows of the 1970s.
Meanwhile, advanced economies in Europe implemented proven job retention and furlough schemes, which paid companies to keep workers on their payroll even while they were not working. “The objective was to stabilise firms and employment relationships,” says Eichhorst.
In the Euro Area, comprising the 19 EU members who have adopted the single currency, workers received about 75% of their wages through these schemes.
The International Monetary Fund estimated that furlough and job retention schemes saved 4 million jobs in the EU, which recorded a record-low unemployment rate in December 2021.
Inevitably, academics and policymakers have debated which model was more effective. Some economists argue that job retention and furlough schemes were more cost-effective than expanded unemployment insurance.
“If it is not too long-lasting, a job retention scheme is probably more cost-efficient than a wage subsidy scheme, and potentially also more cost efficient than just making people unemployed,” says Eichhorst.
Europe’s job retention schemes reduced the acute pain, but they may result in more long-term pain. You have less disruption, but maybe also less radical innovation.
However, the decision to allow massive job losses followed by new job creation allowed U.S. companies to eliminate unproductive jobs and replace them with new ones, expediting a steady but slow-moving long-term trend.
“In the U.S., there were quite painful months in early 2020, but also a speedy recovery that looks different from the European recovery,” says Eichhorst. “Europe’s job retention schemes reduced the acute pain, but they may result in more long-term pain. You have less disruption, but maybe also less radical innovation.”
Along with gauging the effectiveness of each policy in the post-pandemic recoveries of Europe and the U.S., labour economists are working to assess whether either model could be replicated by developing countries to mitigate the impacts of the current global economic slowdown.
An analysis from the Asian Development Bank found that Southeast Asia’s five largest economies – the Philippines, Malaysia, Indonesia, Thailand, and Vietnam – deployed both types of options, providing fiscal backing to companies to pay furloughed workers and broadly expanding unemployment insurance and healthcare schemes to support the large swaths of their populations working in the informal sectors.
Eichhorst believes that the latter of these policies would be more effective in developing countries since European-style job retention schemes require highly formalised government-employer relations and strong mutual dependence between employees and employers.
Furthermore, the Asian Development Bank found that the extensive use of mobile banking and online payments in Southeast Asia helped governments provide large-scale cash transfers to individuals.
“If you have something innovative and digital that helps you get into contact with your citizens that are not so easily approachable through other channels, I think you should use that,” concludes Eichhorst.
