Why the US jobless surge is worse than in Europe

America’s emergency aid supports those made unemployed instead of preventing lay-offs

For decades, European economists have studied the American labour market with admiration, recognising its superior flexibility and lower average unemployment rates over successive economic cycles.  Furthermore, in contrast to many European economies, there has been no upward drift in the equilibrium, or “natural” unemployment rate, needed to stabilise inflation in the long term. These advantages are often said to explain the extra dynamism and higher growth of potential output in the US economy, though some of these claims can be disputed.

But the rise in the US unemployment rate since the start of the Covid-19 crisis has been much greater than that in Europe. According to data for April 2020, US unemployment has risen by 11.2 percentage points since February, while in Germany the increase has been only 0.8 points.

Full crisis figures are not yet available in other European economies, but JPMorgan’s latest forecasts show US unemployment rising by triple the increase expected in Europe by the third quarter of 2020. IMF forecasts show similar patterns.

Why is this happening?

One possible explanation could be that the US lockdowns have been more severe than in Europe. But the opposite seems to be the case. According to Goldman Sachs’ “effective lockdown indices”, the impact on the level of US output from virus control restrictions was around 15 percentage points in April, compared with about 20 points in the EU and the UK.

It seems that US businesses have responded to the events of the past few months by increasing the number of lay-offs much more rapidly than has happened in Europe. This could reflect the traditional hire-and-fire structure of the US labour market, including the much greater ease in declaring redundancies. However, it also seems to be due to the nature of emergency employment support measures introduced on either side of the Atlantic.

In Europe, much of the fiscal ammunition has been spent on directly supporting businesses that have kept workers formally “employed” in their original jobs, even if they are no longer working full time. For example, in Germany, the short-time working scheme — or Kurzarbeit — has already replaced up to 60 per cent of earnings for 10m employees who might otherwise have lost their jobs. This scheme worked well after the 2008 financial crisis and is now being copied by other European countries.

In the UK, the coronavirus job retention scheme has replaced 80 per cent of lost earnings for 7.5m employees, up to a maximum of £2,500 a month. Chancellor Rishi Sunak has sensibly announced that a version of this scheme will remain in place at least until the end of October. Without such schemes, lay-offs and redundancies in Europe would already have been vastly greater.

In the US, the nature of government support has been different. The overall scale of fiscal spending through the Coronavirus Aid, Relief, and Economic Security Act has been larger than in Europe. However, more of it has been aimed at income support for workers who have become unemployed, often with the result that some of those displaced are actually better off than in their full-time jobs before the crisis.

While the American Paycheck Protection Plan is intended to help small companies keep workers in their original jobs, its coverage has been limited compared to equivalent programmes in Europe. Bottlenecks have slowed down the disbursement of urgently needed cash.

There is still time to repair some of these snags in future stimulus packages, but Congress does not seem to be travelling down that path. This is perhaps why Federal Reserve chairman Jay Powell has repeatedly expressed strong concerns about the danger of the huge surge in unemployment becoming entrenched, slowing economic recovery. He warns this could happen unless there are new programmes of direct intervention from the federal government.

Recent influential research by economists at the Federal Reserve Bank of San Francisco has reached similarly worrying conclusions about the persistence of high unemployment after the pandemic. Ironically, the flexibility of the US labour market, which has long been its greatest asset relative to Europe, may have become a handicap during the current crisis.

The effect of job support in the US and Europe

The immediate rise in recorded unemployment since the Covid-19 crisis began seems to have been much larger in the US than in the eurozone and UK. The graph below, prepared by Fulcrum Asset Management, suggests that the coverage of job-support schemes may account for part of this difference. There is no data available yet on the role of other important factors, such as participation rates in the main economies.




Source: This note is based on material which appeared in an article by Gavyn Davies published in the Financial Times on 17 May 2020.
This material is for your information only and is not intended to be used by anyone other than you. It is directed at professional clients and eligible counterparties only and is not intended for retail clients. The information contained herein should not be regarded as an offer to sell or as a solicitation of an offer to buy any financial products, including an interest in a fund, or an official confirmation of any transaction. Any such offer or solicitation will be made to qualified investors only by means of an offering memorandum and related subscription agreement. The material is intended only to facilitate your discussions with Fulcrum Asset Management as to the opportunities available to our clients. The given material is subject to change and, although based upon information which we consider reliable, it is not guaranteed as to accuracy or completeness and it should not be relied upon as such. The material is not intended to be used as a general guide to investing, or as a source of any specific investment recommendations, and makes no implied or express recommendations concerning the manner in which any client’s account should or would be handled, as appropriate investment strategies depend upon client’s investment objectives. Funds managed by Fulcrum Asset Management LLP are in general managed using quantitative models though, where this is the case, Fulcrum Asset Management LLP can and do make discretionary decisions on a frequent basis and reserves the right to do so at any point. Past performance is not a guide to future performance. Future returns are not guaranteed and a loss of principal may occur. Fulcrum Asset Management LLP is authorised and regulated by the Financial Conduct Authority of the United Kingdom (No: 230683) and incorporated as a Limited Liability Partnership in England and Wales (No: OC306401) with its registered office at Marble Arch House, 66 Seymour Street, London, W1H 5BT. Fulcrum Asset Management LP is a wholly owned subsidiary of Fulcrum Asset Management LLP incorporated in the State of Delaware, operating from 350 Park Avenue, 13th Floor New York, NY 10022.
©2020 Fulcrum Asset Management LLP. All rights reserved