Endless Employment and Unemployment Support... Debates Abroad Over Prolonged COVID-19

European-style support payments for furloughs without layoffs due to COVID-19
US-style direct support to the unemployed for reactive measures

Short-term unemployment prevention to protect consumption vs. encouraging flexible restructuring
Prolonged furloughs have effects similar to unemployment
Financial support may hinder industrial structural changes

[Image source=AP Yonhap News]

[Asia Economy Reporter Kim Eunbyeol] Due to the prolonged duration of the novel coronavirus disease (COVID-19) pandemic, employment shocks have intensified, causing countries worldwide to grapple with solutions. The support periods for policies introduced at the early stages of the COVID-19 outbreak are nearing their end, and there is no sign of the virus being contained. Opinions are divided on which approach suits the COVID-19 era better: the European-style method that prevents mass unemployment by encouraging companies to maintain employment, or the American-style method that tolerates unemployment but compensates individuals' income retrospectively.

According to reports from Germany's S?ddeutsche Zeitung and others on the 12th (local time), the German government recently decided to extend the support period for the COVID-19 short-time work scheme (Kurzarbeit) from 12 months to 24 months. This system compensates wages when companies maintain employment by adopting measures such as a four-day workweek. Since the COVID-19 outbreak, the application conditions have also been significantly relaxed. The United Kingdom, which modeled its system after Germany's, is also likely to extend this policy.

Employment retention policies in European countries were highly effective during the financial crisis. The explanation is that by minimizing mass unemployment during short-term economic shocks, the speed of economic downturn caused by reduced consumption is slowed. This system is also why European countries' unemployment rates have held up relatively well despite the COVID-19 crisis. While the U.S. unemployment rate rose to a maximum of 14.7% this year, Germany's unemployment rate remained in the 6% range. The U.S., with a flexible labor market, mainly uses policies that tolerate unemployment but provide government support payments to individuals afterward.

[Image source=EPA Yonhap News]

The problem is that there is no end in sight to the COVID-19 crisis. When the shock is short-term, maintaining a low unemployment rate can enable a 'V-shaped recovery' during economic rebound, but if not, the fiscal burden only increases without expecting substantial effects. Tiffany Wilding, an economist at PIMCO, the world's largest bond management company, said, "The longer the duration, the weaker the policy effects in Europe may become," adding, "Industries hit hard by COVID-19, such as travel, will take considerable time to recover to pre-crisis levels, and cases of long-term furloughed workers transitioning to actual unemployment are increasing." There is also criticism that natural restructuring and corporate changes inevitably slow down. Sebastian Link, a labor market expert at the IFO Institute for Economic Research, stated, "(If support measures are prolonged) structural changes in sectors like the automotive industry could be hindered."

Earlier, the Bank of Korea also issued a similar diagnosis. Kim Hyejin, a senior researcher at the Bank of Korea's Economic Research Institute, cited a report from the National Bureau of Economic Research (NBER) pointing out that a significant portion of furloughed workers due to COVID-19 are likely to become unemployed.

According to the Bank of Korea, the number of temporarily furloughed workers in the second quarter of this year (April to June) increased by 730,000 compared to the same period last year. This is ten times the number of temporarily furloughed workers during the global financial crisis and more than six times that during the foreign exchange crisis. Temporarily furloughed workers refer to those who could not work during the survey period due to temporary illness, accidents, childcare, etc., but can return to work once the reason for furlough is resolved. If the return of temporarily furloughed workers is delayed, it could become a burden on the domestic economy. The Bank of Korea also expressed concern in another report that "some temporarily furloughed workers may transition to unemployment." It added that the delay in the return of temporarily furloughed workers and the reduction or postponement of new hires by companies could occur.

Experts have pointed out that the Korean government now needs to adopt a perspective on the prolonged COVID-19 situation and refine its policies. Representative recommendations include ▲supporting reduced working hours rather than unpaid leave ▲carefully selecting industries that cannot withstand COVID-19 ▲using part of the support funds for retraining unemployed individuals.

Meanwhile, the government approved the fourth supplementary budget bill at the Cabinet meeting, which includes measures such as extending the employment retention support payment period for general industries from 180 days to 240 days annually. Employment retention support payments are a system where the government partially supports the suspension allowance that employers must pay when companies temporarily suspend operations or furlough employees instead of adjusting employment due to temporary business difficulties, indirectly preserving employment. Last month, the support period for special employment support industries was already extended to a maximum of 240 days. The 'second emergency employment stabilization subsidy' will also be provided for 700,000 vulnerable workers outside employment insurance, including special employment workers (special types of workers, hereafter called "teukgo") and freelancers.

This content was produced with the assistance of AI translation services.