Europe's Job Retention Schemes Contained Unemployment, But Challenges Remain

IMF News, March 30, 2022

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COVID-19 caused the most severe shock to the European economy for at least 75 years, with significant disruptions to the labor market.
A powerful policy response cushioned the pandemic’s impact and prevented unemployment from spiking as sharply as initially feared.
The region faces a second shock from spillovers caused by Russia’s invasion of Ukraine, creating risks that authorities should consider as they scale back policy responses.

Job retention schemes reduced the euro area’s unemployment rate by 2.5 percentage points relative to a no-intervention scenario.
These schemes kept around 4 million workers in their jobs.
Unemployment in the EU declined to a record low of 6.2 percent in January 2022.
Labor force participation has reached an all-time high.
Aggregate total hours worked are still below levels seen at the end of 2019.
Pre-pandemic estimates suggested about 5 million jobs would be created over the next 10 years in the four largest countries of the euro area; the pandemic has cut that projection by up to 1.5 million, with losses concentrated mostly in low-skilled sectors.

Recovery speed has varied across countries, industries, and population groups due to different initial conditions, policy support, and underlying growth.
Examples:
- The unemployment rate in France and Spain is now below pre-crisis levels.
- Recovery in countries such as Estonia and Latvia has been more gradual.
Sectoral differences:
- Employment in contact-intensive sectors is recovering more slowly.
- Workers in contact-intensive industries tend to be young, low-skilled, and on temporary employment arrangements; they face greater difficulty returning to pre-crisis employment or hours, potentially exacerbating inequality.
Recent unwinding of job retention schemes in some countries such as the United Kingdom has so far not led to higher unemployment, likely due to strong labor demand, early retirement by older workers, and potential reporting lags as workers serve out notice periods.
The effects of Russia’s invasion of Ukraine could complicate recovery through lower growth and significant migration flows for some countries.

The pandemic has accelerated structural transformations: digitalization, automation, and increased climate action.
These transformations will likely involve significant reallocation of workers across sectors and occupations over the longer term.
Uncertainty remains about how the latest crisis will affect medium-term job creation projections.

Adjust job retention schemes so that they do not hamper the necessary reallocation.
- Scale them back to pre-crisis levels gradually.
- Increase targeting of support to sectors that remain most affected by health-related restrictions.
Help workers move directly between jobs to prevent unemployment and inactivity.
- Enhance policies that facilitate job search, incentivize hiring and geographical mobility, and promote training and reskilling—including to narrow the digital skills gap.
- Preserve a high degree of flexibility in labor and product markets to ease labor market transitions.
Minimize scarring from the pandemic by reinforcing active labor market policies and rethinking safety nets and social protection systems to ensure that nobody is left behind.

Source: IMF European Department, March 30, 2022.