EcoWeek

The COVID-19 pandemic and the labour market

Eco week 20-13 // 3 April 2020  
economic-research.bnpparibas.com  
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EDITORIAL  
THE COVID-19 PANDEMIC AND THE LABOUR MARKET  
In March, the employment component of the purchasing managers indices for the eurozone declined, whereas in the  
US, initial jobless claims skyrocketed. Companies need flexibility to manage their cost base but households suffering  
from an unemployment-related income loss would act as a headwind to the recovery. In the US, the Federal govern-  
ment will top up unemployment benefits, which vary from state to state. In Europe, short-time work schemes allow  
employers to adapt their workforce without having recourse to costly lay-offs.  
The economic consequences of the COVID-19 pandemic are becoming unemployment and the fear of job loss may imply that a temporary  
increasingly visible by the day. This week, the IHS Markit PMI composite health crisis ends up having a longer-lasting negative impact on the  
output index for the eurozone recorded the biggest monthly drop ever, economy.  
reaching an all-time low of 29.7. The big decline in the services sector  
Even in a normal recession, the labour market dynamics can explain  
is pulling down the overall number, considering that manufacturing  
why recoveries end up being very sluggish. One way to address this  
shows some resilience. The employment sub-series of this indicator  
is having recourse to short-time work. This saw a significant pick-up  
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shows a sharp decline, the biggest since June 2009 . This is a matter  
during the 2008-2009 recession in several European countries although  
of concern given its correlation with employment data and, with some  
the absolute level remained low: about 3% in Germany and Italy, less  
delay, household spending. In the US, the labour market conditions  
than 1% in France. In the US, where dismissals are less costly for the  
are deteriorating very quickly. After last week’s initial jobless claims of  
employer, the percentage of employees in short-time work schemes  
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million, this week’s number skyrocketed further, reaching 6 million.  
remained negligible. Short-time work offers the advantage that people  
hold on to their job which, apart from the financial impact, has the  
advantage of reducing uncertainty. In addition, companies can scale up  
activity smoothly when things improve without having to spend time  
and costs on searching for new staff.  
The US Congressional Budget Office (CBO) expects a sharp contraction  
of the economy in the second quarter with an unemployment rate that  
would exceed 10 percent. Loretta Mester, the President of the Federal  
Reserve Bank of Cleveland, has said that US unemployment could be  
between 10% and 30%. Although this would already represent a spec-  
tacular increase from the 4.4% reached in March, certain estimates are  
far bleaker: a back-of-the-envelope estimation by the Federal Reserve  
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Bank of St Louis based on how different sectors and job categories  
EUROZONE: COMPOSITE PURCHASING MANAGERS INDEX  
could be affected by the lockdown, shows that in the second quarter, 47  
million people could lose their job and the unemployment rate could  
reach 32%.  
PMI Composite  
65  
Nobel Prize winner Paul Krugman considers that “we’re going into  
the economic equivalent of a medically induced coma, in which some  
brain functions are deliberately shut down to give the patient time  
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0
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0
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to heal. ” However, in the meantime bills and wages still need to be  
paid. As aptly put by Larry Summers: “economic time has stopped, but  
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financial time has not been stopped” . Applying this to companies, in  
a lockdown, their revenues decline or stop altogether and the same  
applies to variable costs. Eventually, because of financial constraints,  
they may be forced to reduce the fixed costs base, including shedding  
jobs. Household spending behaviour during lockdown but also once  
things get back to normal, will very much depend on whether they still  
have a job and can expect to hold on to it in the months ahead. Rising  
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35  
3
0
25  
2
0
2000  
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. Source: IHS Markit Eurozone Composite PMI® – final data, press release, 3 April 2020.  
2004  
2008  
2012  
2016  
2020  
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. Back-of-the-Envelope Estimates of Next Quarter’s Unemployment Rate, Miguel Faria-e-  
Castro, Federal Reserve Bank of St Louis, March 2020  
SOURCE: MARKIT, BNP PARIBAS  
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. Paul Krugman, Notes on Coronacoma Economics, 31 March 2020.  
. Larry Summers on Bloomberg TV, 6 March 2020  
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It is difficult to envisage a lasting acceleration of growth once  
the lockdown has ended when a large number of households  
would suffer a big income loss compared to the pre-pandemic  
situation.  
The bank  
for a changing  
world  
Eco week 20-13 // 3 April 2020  
economic-research.bnpparibas.com  
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In the current crisis, this approach is again very much adopted in benefits. Using a means-tested system, each American household will  
Germany. In March, the Federal Employment Office (FEO) has received receive a check from the Treasury for a maximum amount of USD 3,000  
short-time work applications from around 470,000 enterprises. This each. The Federal government will also top up unemployment benefits,  
means that 13.5% of registered enterprises have applied for it. In 2019, which vary from state to state but which average roughly USD 300 a  
an average of around 1,300 companies per month reported short-time week, by USD 600 a week during the 4-month period ending 31 July  
work. In February 2020, the number of short-time work applications 2020. Should the lockdown last longer than expected or should job cre-  
was 1,900. Faced with high demand, the FEO has adapted its processes ation take time to kick-in post lockdown, more support will be needed:  
in order to enable a rapid granting of short-time allowance, unemploy- it is difficult to envisage a lasting acceleration of growth when a large  
ment benefits and basic security.  
number of households would suffer an income loss compared to the  
pre-pandemic situation.  
Several other European countries have taken measures to facilitate re-  
course by companies to part-time or temporary unemployment whilst  
providing income support to households . In the US, the Coronavirus  
Aid, Relief, and Economic Security Act (CARES), will transfer roughly  
USD 630 bn to American households through tax credits or extended  
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William De Vijlder  
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. An overview of these and other measures is provided in COVID-19: Key measures taken by  
governments and central banks, Ecoflash, BNP Paribas.  
The bank  
for a changing  
world  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
Ce site présente leurs analyses.
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