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Europe's Economic Recipe for the Pandemic: Keep Workers in Their Jobs

Some policy makers say the U.S. should follow the European approach of wage-subsidy programs.

Workers leave a Volkswagen plant in Wolfsburg, Germany, on March 19. Many European manufacturers have closed facilities.PHOTO:FABIAN BIMMER/REUTERS

The U.S. and Europe are scrambling to shield workers from the fallout ofthe coronavirus pandemic. But while the U.S. istrying to soften the blowfor millions who have already lost jobs, Europe is taking a different approach: stopping people from getting fired in the first place.

In the past days, governments across the continent have deployed new programsor extended existing onesto subsidize the wages of idled workers, allowing employers to keep them in their jobs even if there is nothing for them to do.

While the models vary by country, eligible workers would generally see all or part of their wages paid by the government while they either stop working or work a reduced shift, all the while remaining on their company's payroll.

Such programs, according to economists, can not only provide quick relief to businesses and workers in a sudden downturn, but also allow companies to hit the ground running once activity picks up again without having to hire and train new staff.

"There are a number of structural features of Western European labor markets...that may be helpful in mitigating impacts compared with, for example, the U.S.," saidMalcolm Barr, an economist at JPMorgan. "Employment relationships are typically more stable than in the U.S."

On Dec. 1, 2019, a patient in Wuhan, China, started showing symptoms of what doctors determined was a new coronavirus. Since then, the virus has spread across the world. Here's how the virus grew to a global pandemic. Photo: Getty Images

At a macroeconomic level, maintaining the income of furloughed workersat least over a limited period of timecan support demand and therefore gross domestic product, helping the economy rebound faster.

This isn't the first time Europe has tested the recipe.

As the global economy seized up in the wake of the Lehman Brothers collapse in 2008, the rapid deployment of wage-subsidy programs saved 580,000 jobs in Germany and 130,000 jobs in Italy, according to the Organization for Economic Cooperation and Development. A study by the Paris-based research body found that the use of these programs across its 36 members, nearly nonexistent in 2007, covered 4.5 million workers in 2009.

"Short-time work schemes had a significant impact on preserving jobs during the global financial crisis," the OECD concluded.

...prompting interest in short-time workingschemes, which helped Germany to protectjobs in 2009-10Germans receiving compensation from thegovernment for working reduced hours,year-over-year change Sources: IHS Markit (PMI); Commerzbank*Above 50 indicates expansion, below, contraction.

Some policy makers say the U.S. should follow the European approach.Neel Kashkari, head of the Federal Reserve Bank of Minneapolis, has advocated giving forgivable loans to small businesses that keep staff on.

"It would be much betterand much better for the taxpayers and for the countryto keep small businesses operating and to keep them with their employees intact," he said in a Sunday interview on television news program "60 Minutes."

In the 12 months following the Lehman Brothers collapse, the U.S. unemployment rate rose by 3.6 percentage points to 9.6%. In the eurozone, it rose by a more modest 2.4 percentage points to 9.9%.

Over the longer-term, however, the U.S. job market proved stronger than those of its European counterparts. The rise in eurozone unemployment peaked in June 2013, while the U.S. unemployment rate topped out at the end of 2009.

There are other caveats. The programs are a big drain on public finances and not every country can afford them, especially if the downturn is prolonged. In an unprecedented situation like today's, it is impossible to estimate how steep or lasting the economic contraction will be for most industrial nations.

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Germany this month made it easier for companies to access the program. It will now be available as soon as at least 10% of a company's workers are put on shorter shifts, down from a third. The government says it received 77,000 applications for short-time work last week, compared with a weekly average of 600 last year.

Around 1.5 million German workers benefited from the subsidies at the program's peak in 2009, for a total cost to the German government of around 4.6 billion ($4.9 billion) that year, according to Commerzbank. This time, the breadth of the shutdown means the plan might be tapped by 4.5 million workers, perhaps for several months, according toJoerg Krmer, the bank's chief economist.

Germany's Federal Labor Ministry estimates that around 2.35 million workers will access the plan, for a total cost of 10 billion. That is manageable for a government agency that is sitting on around 26 billion in reserves. Countries that have been running high budget deficits or are entering the crisis with a higher level of unemployment may struggle to fund similar mechanisms.

As part of an emergency package of measures, the French government has said it would pay 84% of any furloughed employee's net salary up to 5,330 a month instead of 1,219 under the previous plan. It estimates the cost at 8.5 billion for two months.

In the Netherlands, any company expecting a revenue drop of at least 20% may apply for an allowance so it can pay up to 90% of employees' wages for three months. The government will advance up to 80% of the requested amount.

In Spain, workers can earn 70% of their base salary as an unemployment subsidy, capped at 1,400 a month. Once the temporary layoff period is over, firms must rehire all workers and keep them for at least six months. Similar systemswith national variationsexist across Scandinavia, combining support for businesses and workers.

In the U.K., the government will cover 80% of workers' wagescapped at 2,500 ($2,871) a monthfor three months starting at the end of April provided companies don't lay them off.

There are tentative signs the policy is slowing what might otherwise be rapid job losses. A closely watched survey of U.K. purchasing managers published Tuesday byIHS Markitsuggests a fall in employment in March of around 1% compared with a year earlier, according toSamuel Tombs, chief U.K. economist at Pantheon Macroeconomics.

In the U.S., by contrast, unemployment benefit claims have been pushing higher. In the week ended March 7, 211,000 new claims were filed. Last week, the figure rose to 281,000. Goldman Sachs Economics Research estimates new claims could hit as many as 2.25 million when the Labor Department releases new figures Thursday.

While each country has a different approach, the short-time work programs generally don't reach temporary workers or help the self-employed. Across Europe, the share of temporary workers varies widely, reaching highs of 27% in Spain and 21% in the Netherlands. Self-employment is around 15% of the workforce, with highs of 23% in Italy and 33% in Greece.

Even for full-time employees, short-time wage subsidies don't always leave recipients substantially better off than if they were to lose their jobs.

Marcella Binz, a language teacher in Berlin, has been tapping the subsidies since mid-March. She says she's paid around 1,000 a month, two/thirds of her normal wagescompared with 67% for 12 months under Germany's universal unemployment insurance plan.

That's helpful, but not enough, she says, given that her fixed costs, such as housing, come to 600 a month. She says she has borrowed money from family members to help her meet expenses.

"We're all afraid," she said.

Jason Douglas and Noemie Bisserbe contributed to this article.