European unemployment is half that of America. Here’s why

Unemployment in the European Union ticked up in April as job losses tied to the coronavirus pandemic mounted. But short-time work programs — which are far more common than in the United States — helped cushion the blow.

The EU unemployment rate rose to 6.6% in April from 6.4% in March, Eurostat, the statistical office of the European Union, said Wednesday.

A worker adjusts the Mercedes logo on a car at a production line at the Mercedes-Benz plant in Sindelfingen, Germany, on April 30, 2020. (Photo by Andreas Gebert/Anadolu Agency via Getty Images)

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Job losses were not spread evenly across all EU countries. The unemployment rate in Spain, which was hit hard by the coronavirus, increased to 14.8% from 14.2% the previous month. Germany, meanwhile, held its unemployment rate steady at 3.5%, according to Eurostat.

Still, the data indicates that Europe has been able to keep a lid on unemployment while battling its worst economic crisis since the 1930s. The European Commission predicts that GDP in the 19 countries that use the euro will contract by 7.75% this year, a record.

Economists partially credit the widespread reliance on short-time work programs, which encourage struggling companies to retain employees but reduce their working hours. The state then subsidizes a portion of their pay. In Germany, for example, the government covers between 60% and 67% of pay for hours not worked.

“Short-time work schemes are incredibly effective at cushioning the initial impact of the economic crisis,” Bert Colijn, senior eurozone economist at Dutch Bank ING, told clients Wednesday.

Programs of this type have long been popular in Europe, where it’s harder to hire and fire workers, and many employees are covered by collective bargaining agreements. They’re utilized less frequently in the United States, where unemployment hit 14.7% in April.

At the end of April, businesses in the European Union had submitted roughly 42 million applications to support workers through short-time work programs, according to a study by the European Trade Union Institute. That’s equivalent to nearly 27% of all EU employees.

But UBS economist Anna Titareva says that labor market surveys may not be capturing the full extent of the damage to EU workers. The survey surprisingly shows unemployment in Italy fell to 6.3% from 8% in March.

“It appears that some people who lost their jobs after the introduction of mobility restrictions were not counted as unemployed,” Titareva said in a research note.

To be considered unemployed for the purposes of the EU survey, a person must be actively seeking work and ready to start a new job within the next two weeks. Restrictions on movement or ongoing childcare needs may have forced people to hold off on looking for jobs, Titareva said.

Moving forward, much depends on the duration and scale of the economic downturn. Europe’s short-time work programs work well as stop-gap measures, but they can only be used on a temporary basis.

“As the recovery is likely going to last for quite some time, unemployment is set to rise significantly, although short-time work will help output to recover more quickly once demand returns,” Colijn said.

-— Correction: An earlier version of this story misstated the month when US unemployment reached 14.7%.