Recent extensions to job retention schemes and hopes of a vaccine appear to have improved the outlook for labour markets. But there is still a risk that governments scale back support too quickly and it is almost inevitable that further job losses are to come given the scale of the recession that we have experienced.
- Recent extensions to job retention schemes and hopes of a vaccine appear to have improved the outlook for labour markets. But there is still a risk that governments scale back support too quickly and it is almost inevitable that further job losses are to come given the scale of the recession that we have experienced.
- Table 1 shows the key details of the various short-term working schemes, wage subsidy schemes and furlough schemes and allows us to make some comparisons across countries. The first thing that stands out is that these schemes are quite similar in their generosity – the governments pay between 60% and 80% of workers’ wages in most cases. However, they differ to a greater extent on coverage. Peak take-up was highest in the UK and France with 26.0% and 28.8% of their workforce supported, respectively. But at its peak, the German Kurzarbeit scheme was supporting a far smaller 12.6% of the labour force – presumably because the economy has a larger manufacturing sector which has been less affected by lockdowns.
- While take-up of the Paycheck Protection Program (PPP) was strong in the US, it provided far less support to employment than schemes in other major economies. Firms only had to spend 60% of the loan on payroll costs to qualify for forgiveness. And the loans were only big enough to last for 8 weeks, rather than months. Instead, the $600-a-week rise in unemployment benefits did much of the heavy lifting to support incomes and ongoing support through the benefits system means incomes are still above pre-pandemic levels.
- Originally, a number of these schemes were due to be scaled back at the end of Q3 and the start of Q4. Given that activity was still far below pre-virus levels at this time, we were concerned about the possible adverse effects on unemployment which were borne out to some extent in the UK. As the furlough scheme was scaled back in August and September, the unemployment rate rose from 4.3% in July to 4.8%. (See Chart 1.) But since then, the resurgence of virus cases and associated imposition of second lockdowns has caused governments to rethink and the schemes have typically been extended at their peak generosity until at least the start of next year, and in most cases until the spring. (See Table 1 again.)
- Of course, this may just push back the day of reckoning, particularly if economic activity remains depressed. After all, with these schemes costing governments the equivalent of between 1% and 3% of GDP, they are very expensive and cannot be extended indefinitely. But there are three sources of comfort.
- First, labour markets are now less reliant on these schemes than they were during the early stages of the pandemic. They now cover between 2.7% and 5.4% of workers in the euro-zone. Given that firms have now begun to adjust to lockdown measures and since the new restrictions are more targeted allowing more forms of work to continue, we doubt that recourse to job retention schemes will return to its previous peaks. Even in the UK, where a second lockdown came into force this month, we estimate that the scheme will be applied to 15% of workers, which is just over half the number at its previous peak.
- Second, the experience of countries where the schemes have already been scaled back is fairly encouraging. Unemployment rates have risen in both Australia and New Zealand, to between 1 and 2ppts above pre-virus levels, but we do not expect them to rise much further. (See Chart 2.) Meanwhile, in the US, the unemployment rate has continued to fall even as some of the fiscal support expired, a trend we expect to continue.
- Admittedly, economic activity in these countries had recovered somewhat by the time their schemes were wound down. But this brings us to the third and most important reason for hope: recent news about vaccines suggests that activity may be picking up significantly by the time the schemes are currently scheduled to end. One exception is Spain where the short-term working scheme is due to expire at the end of January, which seems premature.
- In all, recent developments mean that we feel slightly less concerned about labour market prospects. But unemployment rates are set to rise in the euro-zone, Japan and the UK. And further ahead, labour market scarring caused by long periods out of work and by sectoral shifts may cause the effects of the crisis to linger on in some economies.
Chart 1: UK ILO Unemployment Rate (%)
Chart 2: Unemployment Rate (%)
Sources: Refinitiv, Capital Economics
Table 1: Job Retention Schemes
Scheduled End Date
Share of Salary (%)
Estimated Fiscal Cost (% of GDP)
(% of Labour Force)
(% of Labour Force)
5 (Nov, Forecast)
12 months, more generous rules until end-2021
60 (net), rising to 70% from 4th month and then 80% from 7th month
12 months (summer 2021)
PPP Recipient firms accounted for 50m jobs
PPP Recipient firms accounted for 30% of the labour force
Ended in early August
US (Unemployment Benefits)**
$600 weekly supplement expired in early August
*PPP provided loans to small businesses which were forgivable as long as the funds were used to maintain payrolls. Note: numbers not comparable to UK and Euro-zone.
Gabriella Dickens, Global Economist, email@example.com