The coronavirus pandemic has led to widespread job losses across most advanced economies, as governments have mandated ‘lockdowns’ in an effort to stop the spread of the disease. No country has managed to avoid rising unemployment. To cushion the blow, governments have pumped large amounts of money – several per cent of GDP – into labour market policies. The UK government, for example, is expected to spend over £80 billion (or 3.7% of annual GDP) on such policies over the next eight months. But the approaches taken have differed, and the policies chosen appear to have had important consequences for workers.
Some countries have experienced large increases in unemployment, while others have sustained links between employers and employees, even though all have experienced large economic contractions. This is hugely important, both for assessing the effectiveness of policies so far and in thinking about the task ahead as governments attempt to release the lockdown restrictions and get their economies going. This paper compares the experiences of five countries that illustrate how different policy decisions have been associated with different labour market outcomes, setting up very different future challenges.
Australia, Canada, Ireland, the UK and the US have all experienced a huge economic shock. In the first four of these countries, a third of the workforce or more is now having their income fully paid or heavily subsidised by the government – equivalent figures are not available for the US. But the types of policies that each country has adopted, and their resulting unemployment numbers, look very different from one another. In all of these countries, the state is now paying much more to support people’s incomes than before the crisis.
- In Australia, the share of the workforce receiving unemployment benefits has increased by six percentage points to 12%, and a further 21% of the workforce now works for businesses receiving wage subsidies from the government because their turnover has fallen substantially.
- In the UK, the share of the workforce on Universal Credit – the means-tested benefit for households with low incomes – has increased by around six percentage points to 15% (up from 9% before the lockdown was introduced). But on top of this, around 24% of the labour force is currently furloughed, with up to 80% of those workers’ pre-COVID wages paid for by the government. This suggests that nearly two fifths of the UK workforce is doing little or no work and having their income provided in whole, or large part, by the state.
- In Canada, around two fifths of the workforce has received at least one payment of the Canada Emergency Response Benefit (CERB), which supports those who have lost all – or virtually all – work due to the pandemic. The government also subsidised the wages of around 10% of the workforce in April through the Canadian Emergency Wage Subsidy (CEWS). This suggests that close to half of Canada’s workforce had its income supported by the government in the weeks following the lockdown.
- In Ireland, almost a third of the workforce is receiving the new Pandemic Unemployment Payment (PUP) or Jobseeker’s benefits (compared to just 7% receiving Jobseeker’s benefits before the crisis) and a further 19% have had their wages subsidised at some point over the past two months by the state through the temporary wage subsidy scheme. As a result, more than half of Ireland’s workforce has had its income substantially supported by the state since the crisis started.
- In the US, 18% of people were receiving unemployment benefits by early May (up from less than 1% before the crisis). A further set of workers are being supported by two federal programmes that incentivise and enable businesses to keep employing workers; however, unfortunately, figures are not currently available for how many US employees’ wages are being subsidised in this way. (The larger of the two schemes – the Paycheck Protection Program – had made loans to 4.4 million US businesses by 19 May.)
All five countries have experienced a large increase in unemployment, as Figure 1 shows. But in some, the increase has been much more dramatic than in others. Unemployment has increased much more in Canada, Ireland and the US than in Australia and the UK. This is because the governments in Canada, Ireland and the US channelled much more of their labour market support through enhanced unemployment benefits than Australia and the UK did – the latter two countries instead focused support through wage subsidy schemes. However, the precise details of the schemes and when they were announced also appear to have been important in determining how far and how fast unemployment has increased:
- Generosity of unemployment benefits: Unemployment rates have risen by much more in countries that have substantially increased the generosity of their unemployment benefits in response to the coronavirus crisis. Canada, Ireland and the US have introduced new pandemic unemployment benefits, which are much more generous than benefits available in normal times. These new benefits are particularly generous to low earners. In Canada and Ireland, these benefits pay an amount that is broadly equivalent to the income available from working full time on the minimum wage. The increase in the generosity in the US has been even bigger: the maximum benefit available to recipients of Unemployment Insurance is now worth more than 90% of average wages in all US states and more than 120% of average wages in 21 states. In stark contrast, in the UK and Australia, unemployment benefits still only cover 16% and 34% of median wages, respectively.
- Policy timing: The Canadian and Irish pandemic unemployment schemes were announced quickly, while it took these countries longer to announce and provide clear details on wage support for businesses. In contrast, in the UK and Australia, the governments announced a clear intention early on to channel substantial support through wage subsidies.
- Design of wage subsidy schemes: In the US, the wage subsidy scheme is far less generous to low earners than the new pandemic-era unemployment payments, leaving low earners in a position where they are financially better off, in the short term at least, being made unemployed than remaining with their employer. The same was initially also the case in Ireland. Realising the perverse incentive this provided for low-earning employees to encourage their employers to lay them off rather than retain them on subsidised wages, the Irish government adjusted the wage subsidy scheme to reduce this distortion.
This paper shows that policy has been influential in affecting labour market outcomes during this crisis. If the goal of policy was to support incomes while retaining employer–employee links, it seems as though Australia and the UK have, so far, been more successful than Canada, Ireland and the US. But it is too soon to know what ‘good’ policy looks like in this unprecedented crisis. If people whose wages are currently being subsidised by the government are laid off when that support is withdrawn – as the UK government is suggesting it will begin to do from the start of August – then UK and Australian unemployment may end up looking very similar to the other countries. At the same time, it is also possible that unemployed workers (including those who make up such large numbers in the other three countries in our study) will be quickly re-hired by their old employers, with existing employer–employee links surviving temporary unemployment.
One implication of the different patterns of unemployment we have seen to date is that the adaptations governments will need to make to these policies — to support the economic recovery as lockdown restrictions are eased — differ. In the UK, the key will be ensuring wage subsidy schemes do not hamper the recovery by discouraging businesses from re-hiring workers. Both the UK and Australia also risk discouraging workers from moving to employers and sectors with better prospects, by offering generous incentives for employees to be retained. In Ireland, Canada and the US, the priority will instead be ensuring unemployed people re-enter work, either returning to their old job or to new ones, rather than becoming disengaged from the labour market.
Gemma Tetlow is chief economist at the Institute for Government, working across the institute’s program areas. Thomas Pope is the Institute for Government’s senior economist and works across its programme areas. Grant Dalton Grant is a research assistant on the institute’s public finances project.
This article is an extract from the UK Institute for Government’s report Coronavirus and unemployment, the importance of government policy: a five nation comparison.