Reasons for Higher COVID Unemployment Rate in US than Europe... Bank of Korea: "US Prioritizes Labor Market Flexibility"

Bank of Korea 'Overseas Economic Focus'

[Asia Economy Reporter Kim Eunbyeol] Before and after the spread of the novel coronavirus infection (COVID-19), unemployment rates in European countries remained similar or only slightly increased, whereas the unemployment rate in the United States surged sharply. The Bank of Korea cited the U.S. labor market’s emphasis on flexibility and its industrial structure as key reasons for the much higher unemployment rate.

On the 13th, the Bank of Korea stated in its 'Overseas Economic Focus' report, "The significant difference in unemployment rates between the U.S. and major European countries is largely attributed to the differing unemployment measures in the two regions," adding, "Europe focused on employment retention measures such as reduced working hours, while the U.S. primarily utilized unemployment benefits that provide payments during periods of joblessness."

The Eurozone and the United Kingdom promoted reduced working hours by alleviating employer burdens, relaxing eligibility requirements, and expanding support. This included reducing employers’ social insurance contributions, increasing the compensation rate for leave allowances, and simplifying application procedures to enhance employers’ incentives to utilize the system. After COVID-19, the scope of eligible workers was broadened, restrictions on business types and sizes were lifted, and both the scale and duration of support were extended.

According to estimates by the Organisation for Economic Co-operation and Development (OECD), employment retention schemes have expanded to cover more than 20% of all workers in major European countries since the spread of COVID-19. Italy had 45% participation, France 33%, Germany 30%, and Spain 18%.

In contrast, the U.S. significantly strengthened income support for the unemployed through the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The Act extended the duration of unemployment benefits and provided an additional $600 per week until the end of July. The Paycheck Protection Program (PPP) was established to provide unsecured loans to small businesses for payroll and rent payments, and companies affected by COVID-19 can deduct an amount equivalent to 50% of employee wages from their taxes until December this year.

The Bank of Korea analyzed, "Reduced working hours (European style) are effective in preventing a sharp deterioration in employment conditions, while the U.S. approach of unemployment benefits is useful for mitigating unemployment shocks by preserving household income and ensuring labor market efficiency." As of last year, the U.S. ranked third among 141 countries worldwide in labor market flexibility.

First, reduced working hours have the advantage of preventing a sharp deterioration in employment conditions caused by the COVID-19 shock and reducing additional costs associated with reemployment. However, if the shock persists long-term, it is difficult to avoid an increase in structural unemployment, and it may hinder optimal allocation of labor during economic recovery, potentially burdening employment recovery.

Compared to unemployment benefits, reduced working hours have a higher income replacement rate and are somewhat effective in alleviating the decline in consumer sentiment, whereas unemployment benefits are considered somewhat superior in protecting vulnerable groups. Both policies involve large-scale employment budgets, and with the situation prolonged, additional budget allocations are inevitable, the report added.

The Bank of Korea stated, "Reduced working hours in the Eurozone and the UK help mitigate unemployment shocks and contribute to economic stabilization but may reduce labor market efficiency and slow improvements in employment conditions," adding, "U.S. unemployment benefits are useful for optimal labor allocation during economic recovery but are fundamentally reactive measures with limitations in preventing mass unemployment proactively."

Furthermore, "Traditionally, Europe prioritizes employment stability, while the U.S. emphasizes labor market efficiency, and the pandemic is likely to further reinforce these practices," the Bank emphasized.

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