The sombre impact of Covid-19 in European labour markets

Carlos Vacas Soriano

5 de Julio de 2020, 18:17

The pandemic is having a radical impact on lives and societies and its implications go far beyond health issues and include important economic and labour market consequences. The Covid-19 affects the viability of businesses and places many jobs under risk, acutely impacting the livelihoods of many citizens, especially in Mediterranean countries like Spain

A harsh economic and labour market shock

The current crisis is very different from the one originated a decade ago. The last global crisis started in the financial sector and transmitted to the rest of the economy over several years via a reduction of credit, business investment and aggregate demand. The Covid-19 crisis is the result of state action to combat the spread of the pandemic via lockdowns and social distancing.

These measures have had an immediate impact and the extent of the economic recession in 2020 is going to be far more serious than that of the financial crisis in 2009. According to the spring 2020 Economic Forecast by the European Commission, the Gross Domestic Product (GDP) will decline notably across all EU countries this year: by -7.5% for the EU as a whole, and ranging from -4% in Poland to more than -9% in Italy, France and Spain (see Figure 1).

The major discrepancy between European countries does not emerge in the magnitude of the economic shock caused by the pandemic, but in the way their labour markets will cope with it. The unemployment rate is expected to increase by more than 2 percentage points (p.p.) for the EU as a whole in 2020 (from 6.7% to 9%), but ranging from a rise of less than 1 p.p. in Germany to almost 5 p.p. in Spain and Estonia. While the increase in unemployment is as well above average in other Mediterranean and Eastern European countries, the Spanish (and Polish) case is staggering. Against the background of a rather comparable economic shock, the expected surge of unemployment in Spain (and Poland) is much larger than in Germany, France or Italy.

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Mediterranean countries will continue to be those with the worst unemployment outcomes among all European countries in 2020: the expected unemployment rate will reach almost 20% in Spain and Greece, 12% in Italy and 10% in Portugal, as compared to 9% for the EU as a whole.

Some early findings on the impact of Covid-19 in European societies

Since lockdowns and social distancing measures are the main reasons behind the fall in economic activity, a return to pre-crisis normality is to be expected as these confinement measures are lifted, in a matter of months rather than years as it was the case with the financial crisis. The route to recovery is difficult to predict and will depend on the spread of the virus, possible renewed outbreaks, vaccine and treatment, the impact of containment measures and the policies deployed to fight the economic and employment impact of the virus.

Nevertheless, some features of the impact of the crisis in European labour markets are worth noting. While the financial crisis mainly affected employment in male-dominated sectors (construction and manufacturing), this one affects female-dominated service activities where social gatherings and physical proximity are more common (entertainment, hotels and restaurants, transport, leisure and tourism-related activities). Employment prospects for workers in these sectors are likely to remain bleak in the mid-term.

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Some facts on the early impact of the pandemic on well-being, work and on the financial situation of people living in Europe can be drawn from an online survey carried out by the European Foundation for the improvement of living and working conditions (Eurofound) in April, when most European countries were under lockdown regimes:

  • The pandemic has resulted in job loss, a higher incidence of telework and uncertainty about the future. The percentage of people reporting to have lost their jobs permanently or temporarily is above the European average in all Mediterranean countries (Greece, Italy, Spain and Portugal). Among those workers that kept their jobs, more than a third started to telework as a result of the pandemic in Europe, although the telework take-up was much more prevalent in Scandinavian and Benelux countries and much less so in Spain, Greece and Eastern European countries. Telework tends to benefit those workers with better pay and educational levels, while workers whose jobs contain tasks which cannot be easily done via telework (typically those with lower skills and pay) are at a disadvantage and face a higher risk of job loss. This is why recent research has shown lockdowns increase wage inequality among workers (and income inequality among individuals, as well due to vulnerable groups being more affected by unemployment).
  • Young people reported more job losses, a large reduction in working time and more insecurity about their professional and financial prospects, resulting in greater loneliness and poorer wellbeing. Young people suffered the most the consequences of the financial crisis and may again carry the main burden now: they are normally among those to be laid out first since they hold more precarious and insecure positions in the labour market (many with temporary contracts) and they tend to work more in some of the sectors most affected by lockdowns, such as retail, hotels and restaurants, air transport and other tourism-related activities. These experiences of unemployment may have important long-term scarring effect in the lives and careers of young people, which explains why they are a group of enormous policy concern. This is especially the case in Mediterranean countries, where (unlike in most Eastern European countries) youth unemployment rates were the highest in Europe already before the pandemic.
  • Almost 40% of the respondents claimed their financial situation had deteriorated as a result of the pandemic. This has greatly affected people's prospects, with less than half of the respondents in the EU stating they are optimistic about their own future (see Figure 2). Even fewer respondents are optimistic in Mediterranean countries (and some Eastern European countries): 41% in Spain, 39% in Portugal, 37% in Italy and 31% in Greece.

Comprehensive policy response

Against the threat posed by the Covid-19, policymakers have reacted to mitigate its social and economic impact. According to Eurofound’s Covid-19 EU PolicyWatch database, initiatives have taken place at different levels. In clear contrast with events in the financial crisis a decade ago, a swift EU reaction aimed at supporting jobs and businesses has taken place via the adoption of a package of measures, including: flexibility of EU fiscal rules; a €540 billion emergency rescue package, including a European Guarantee Fund to finance companies, and supporting the implementation of short-time working schemes; and plans to borrow €750 billion to support recovery efforts in the EU.

European countries have responded very quickly by amending or adopting new legislation and allocating significant resources to fight the effects of the pandemic on businesses, workers and citizens. Three main areas of intervention emerge: a majority of the measures try to help business staying afloat, primarily by means of non-repayable grants for the self-employed, micro and small businesses, and state-backed access to finance or deferral of payments; measures aimed at protecting employment are mainly linked to short-time working schemes, which nevertheless remain very different across countries; many interventions are aimed at protecting incomes and it appears many countries expanded their benefit systems to include groups not previously covered (such as temporary employees or self-employed). Despite these efforts, many people and households have suffered notable reductions of their incomes, and measures deferring rent and mortgage payments have been introduced as well.

Even though there has been a significant effort in many countries to extend the coverage of income support schemes, this crisis has highlighted again how those European countries where temporary contracts are more common (Spain or Poland) tend to suffer the largest unemployment hikes, since atypical groups of workers are most directly impacted during economic downturns. As it occurred a decade ago, Germany and Spain offer again polar opposite examples of labour market reactions: while Germany adapts to a reduced economic activity with minor employment turbulences by adopting measures of internal flexibility (for instance reducing working hours via short-time work schemes), the massive use of temporary contracts in Spain helps explaining why the adjustment in this case takes place via a disproportionate amount of job loss (mainly temporary contracts). Beyond the short-term measures taken to fight the Covid-19, reducing the use of temporary contracts should be a primary policy objective in Spain, so that the same story is not repeated again and again.


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