Pandemic poses long-term threat to labour markets in developed economies

The COVID-19 pandemic and the resulting severe economic restrictions has had a profoundly destructive impact on labour markets in virtually every part of the world.

Developed economies, including the United States, the European Union and Japan, were no exception. In just two months, the aggregate unemployment rate for the OECD countries jumped from 5.2 per cent in February 2020 to 8.5 per cent in April. However, while the unemployment rate has soared into double digits in the US and in Canada in April, it remained virtually unchanged in Germany and Japan and even declined in a number of OECD countries, including Italy.

Several factors explain these OECD labour markets’ divergent responses to the pandemic-induced recession. First, there are significant differences with respect to labour market regulations and the degree of employment protection. The US labour market is more flexible, and this is why unemployment in the US is more volatile compared with other countries.

Second, there are differences in relief policies adopted by the governments. The European countries had more explicit job retention strategies. Whilst the US has allocated significant resources to provide low-cost loans to businesses, the European countries directly subsidizes wages.

Looking forward as economies re-open, employment may recover in the near-term, but more serious challenges are emerging in the long run. The pandemic will drastically change the nature of labour demand. Many businesses and economic sectors may face downsizing or even collapse, when the stimulus support ends.

Leaving labour markets to adjust by themselves without pro-active government policies may lead to protracted high unemployment and a persistent skills mismatch, putting an additional burden on social welfare systems and dampening economic growth prospects. Therefore, active labour market policies addressing those challenges are needed.

Get more details in the August Monthly Briefing on the World Economic Situation and Prospects published on 3 August.

Photo by airfocus on Unsplash

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