A preliminary assessment of the impact of the COVID-19 pandemic on the euro area labour market

Prepared by Vasco Botelho, Agostino Consolo and António Dias da Silva

Published as part of the ECB Economic Bulletin, Issue 5/2020.

This box analyses labour market developments in the euro area since the onset of the coronavirus (COVID-19) pandemic. The containment measures implemented from mid-March resulted in a sharp fall in euro area real GDP in the first quarter of 2020.^[1] Business and consumer survey data indicate that the fall deepened in April and May. However, employment and unemployment do not appear to have been significantly affected. In this regard, the reaction of the euro area labour market to the COVID-19 pandemic appears in sharp contrast with that observed in the United States, where unemployment increased rapidly. This box examines the discrepancy between business and consumer survey indicators and the main headline labour market indicators for the euro area. In addition, we discuss the possible effects of lockdown measures on unemployment statistics in view of the internationally agreed definition of unemployment, and elaborate on the adjustment of hours worked and on the widespread use of short-time work schemes and temporary lay-offs, which are the key policies that have supported the euro area labour market since the start of the COVID-19 pandemic.

Monthly surveys on employment perceptions and expectations point to a strong deterioration in the euro area labour market. The PMI indicator of employment perceptions declined from levels of 51.4 in February 2020 to an historic low of 33.4 in April, rebounding to 43.1 in June as a consequence of the loosening in the containment measures during this period (see Chart A). The decline was particularly acute in the services sector, with the accommodation, food and beverage services and the warehousing and transportation sector being most affected. As for the manufacturing sector, the decline was also broad-based across sectors, and most prominent for motor vehicles, fabricated metal products, and machinery and equipment sectors. Overall, such large declines in these surveys point to a strong contraction in employment in the second quarter of 2020.^[2]

Chart A

PMI Employment

(diffusion index)

There was a historic decline in the number of hours worked in the first quarter of 2020, which helped put into context the muted response of employment. Although containment measures in the majority of euro area countries only started in mid-March, total hours worked, as recorded in the national accounts, dropped quarter on quarter by 3.1% in the first quarter of 2020, in line with the observed 3.6% decline in real GDP in the same quarter. The decline in hours worked was almost twice as large as that recorded in the first quarter of 2009. The decline in hours worked in the first quarter of 2020 was mostly driven by an adjustment in the intensive margin of labour, i.e. the average number of hours worked per person employed. In the first quarter of 2020, average hours worked decreased quarter on quarter by 2.9%, while the decline in employment remained relatively muted in the changing economic environment at 0.2% (see Chart B). The relative contributions of average hours worked (around 90%) and employment (around 10%) to the decline in total hours worked contrast with those observed in the first quarter of 2009, where both margins accounted for roughly half of the decline of total hours worked.

Chart B

Employment growth

(quarter-on-quarter percentage changes)

The moderate increase in the unemployment rate up to the end of May is in sharp contrast with indicators of economic activity. The increase in the unemployment rate until the end of May was lower than what could have been expected based on its historical relationship with GDP (see Chart C). In the United States, between January 2020 and May 2020, the number of non-farm payroll employees decreased by 19.5 million and the unemployment rate increased by 9.8 percentage points.^[3] By contrast, the muted responses of employment and unemployment during the COVID-19 crisis in the euro area compared with the labour market dynamics observed for the United States have been a noticeable feature of the euro area labour market.^[4] The reclassification of some people from unemployment into inactivity could be affecting the unemployment statistics. According to the International Labour Organization’s definition of unemployment, persons losing their jobs or being previously unemployed should be classified as being outside the labour force if they are not actively searching for a job or are not available to take up employment at short notice. This feature would lead to a muted response in terms of the rise in unemployment resulting from the COVID-19 containment measures.^[5] Another key difference is that, in the United States, temporarily laid off workers are considered unemployed, whereas in the euro area the persons affected by short-time work schemes or temporary lay-offs remain, in most cases, on the firms’ payroll and are thus not considered unemployed.

Chart C

Unemployment rate in the euro area and in the United States

(percentages of the labour force)

The widespread use of short-time work schemes in the euro area is one of the key factors behind the overall muted immediate response of the labour market to the COVID-19 crisis. The national governments of euro area countries have implemented extensive labour market policies designed to support workers’ incomes and to protect firms’ jobs during the COVID-19 pandemic. In particular, short-time work schemes and temporary lay-offs have been put in place across the euro area countries, successfully containing dismissals, supporting incomes and helping firms to effectively reduce their payroll costs.^[6] Given the sudden contraction in firms’ sales during the COVID-19 crisis, these schemes have played an important role in helping firms’ to reduce their liquidity needs, while allowing them to resume activity more swiftly after the lockdown by keeping the worker-job relationship intact during the lockdown. The number of workers in short-time work schemes is unprecedented across euro area countries.^[7] Preliminary estimates of the number of workers affected based on firms’ applications to join these schemes show that a substantial share of employees have been affected. These could amount to a maximum of 10.6 million employees in Germany (26% of the total number of employees in the country), 12 million employees in France (47% of employees), 8.1 million in Italy (42% of employees), 3.9 million in Spain (23% of employees) and 1.7 million in the Netherlands (21% of employees).^[8] Indeed, if one takes into account the number of workers in short-time work schemes and on temporary lay-offs, the unemployment rate in the euro area would have reached much higher levels than those currently observed. Chart D provides an illustrative example by adding to the unemployment rate half of the workers in short-time work schemes, assuming that they worked zero hours during May.

Chart D

Unemployment rate and short-time workers in May 2020 for the five largest countries in the euro area

(percentages of the labour force)

The success of the widespread use of short-time work schemes in supporting the euro area labour market will depend critically on the dynamics and duration of the crisis. Labour market policies, in particular short-time work schemes and temporary lay-offs, are supporting employment and mitigating the increase in the unemployment rate in the euro area. These measures can support a faster recovery of the labour market, as they allow firms and workers to resume activity without the costly and lengthy process of search and matching that would have to occur once the employment relationship was lost. This is even more important, as the crisis is more likely to affect low-skilled workers, which usually have higher unemployment rates. Nonetheless, it is to be expected that not all workers in short-time work schemes and on temporary lay-offs will be able to return to their previous jobs.^[9] As a consequence, a further increase in unemployment in the euro area is expected in the short term.