Jobless rate to erase seven years of gains - Capital Economics
European Economics

Jobless rate to erase seven years of gains

European Economics Update
Written by David Oxley
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We think the unemployment rate in the euro-zone will surge to about 12% by the end of June, giving up seven years’ worth of gains in a matter of months. Much of this may prove temporary if the economy rebounds in the second half of the year, as we assume, but it will probably still be above 8% at year-end.

  • We think the unemployment rate in the euro-zone will surge to about 12% by the end of June, giving up seven years’ worth of gains in a matter of months. Much of this may prove temporary if the economy rebounds in the second half of the year, as we assume, but it will probably still be above 8% at year-end.
  • The recent warning from James Bullard, President of the St. Louis Fed, that the US unemployment rate may soon explode to 30% was a sobering sign of how much the economic outlook has deteriorated. Mr Bullard’s comments were probably intended more as a call to arms for American policymakers than a firm forecast, but they raise the question of just how bad things will get for the European labour market.
  • Of course, the US’s more flexible labour market means that a given hit to activity would typically cause a bigger rise in unemployment there than in Europe. But the outlook for the labour market in the euro-zone is still grim. Based on the past relationship between changes in GDP and changes in unemployment (Okun’s Law) our current forecasts for economic activity to decline by 15% in the first half of this year implies that the unemployment rate could double to 15% by the end of June. (See Chart 1.)
  • In practice, things should not be quite as bad as this for three key reasons. First, in contrast to the prolonged periods of pain around the global financial and euro-zone crises, the (hopefully) temporary nature of this shock should make firms reticent to cut labour if they can help it. Indeed, you wouldn’t want to be the only airline without any pilots as and when demand eventually recovers.
  • Secondly, policymakers have leapt into action to provide support for firms to survive the virus-related mayhem, including extending loans to companies and adapting short-time working schemes to address this shock. The Federal Labour Office in Germany expects workers on the kurzarbeitergeld scheme to surge to nearly 2.4 million in the coming months (see Chart 2) – much higher than the peak reached during in 2009. And third, some displaced workers may find work in booming sectors, such as delivery drivers.
  • That said, there will inevitably be people who fall through the cracks either because they have already been laid off or because their company does not qualify for the short-time work subsidy. Moreover, while some governments have extended compensation to the self-employed, temporary and self-employed workers in the most-affected sectors such as accommodation, retail, and transport look vulnerable. As ever, the aggregate numbers will mask significant regional variation: countries such as Greece and Spain look most at risk because more of their employees are on part-time or temporary contracts.
  • While it is incredibly difficult to put a figure on it, we think the number of people in employment may fall by around 5%. This is one third of the fall in GDP which we forecast in the first half of the year. In contrast, employment fell by around half as much as GDP during the global financial crisis. Based on this working assumption, the unemployment rate in the euro-zone would spike to 12% by the end of June – which is close to its record high during the euro-zone crisis – before recovering in H2.

Chart 1: Okun’s Law for the Euro-zone

Chart 2: Germany Workers on Kurzarbeit
(aka, ‘Short-time’ Working (‘000s)

Sources: Refinitiv, Capital Economics; data for EZ since Q1 1999

Sources: Federal Labour Office, Germany


David Oxley, Senior Europe Economist, david.oxley@capitaleconomics.com

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