Europe has kept down pandemic unemployment — and the U.S. hasn’t. Here’s why.

A closed sign is posted in the window of a store because of the coronavirus, in an outdoor mall, in Dedham, Mass. (AP Photo/Steven Senne)
A closed sign is posted in the window of a store because of the coronavirus, in an outdoor mall, in Dedham, Mass. (Steven Senne)
April 24, 2020 at 6:00 p.m. GMT+7

For the first time, the U.S. government is subsidizing companies to hold on to their workers. However, the Paycheck Protection Program (PPP) that Congress passed to fight unemployment in the coronavirus economic crisis is having trouble delivering benefits. Its first round of funds was quickly exhausted.

Congress’s new bill will add more funds, but the problem goes deeper. To understand what is going on, it’s helpful to understand how European governments approach the same problem: through “short time work” (STW) policies. The PPP program in the United States is plausibly more generous to those it helps than its European equivalents. However, it’s having a harder time fighting unemployment. That’s both because of its design and because of the U.S. government’s weaknesses. Here’s what you need to know.

The PPP is supposed to address the crisis faced by American workers

The PPP is supposed to keep people working by loaning funds to small- and medium-sized businesses. Those businesses are then supposed to use the loans to keep paying workers and other basic operating costs. According to the bill, the United States will forgive the loan if businesses use it for payroll costs, mortgage interest, rent, and utilities payments — so long as the borrowing firm keeps the same number of workers.

The program’s rollout has been rough. Small businesses complain they are having difficulty applying for and actually receiving the funds. Some banks that were supposed to distribute the funds imposed additional eligibility rules and prioritized their richer and better established clients.

The program quickly exhausted its initial $349 billion budget. And despite the program, 22 million American workers applied for unemployment benefits in the last month — the biggest spike in unemployment numbers since the Great Depression.

Europe has a different approach

Europe is adopting a different approach. What are called “short-time work policies” directly compensate workers when their hours are reduced. That lets firms avoid layoffs and their associated costs by instead reducing employees’ hours.

These policies aren’t new: Germany has had them for decades, using them in economic downturns to compensate workers whose hours are reduced by paying between 60 and 87 percent of net earnings lost – and more if they are covered by collective bargaining agreements. This helped German companies keep employees during the 2008-09 financial crisis and recover quickly afterward. Since they had not laid off workers but simply put them on hold, they were able to resume production easily when market conditions improved. Now other European countries such as the United Kingdom and Sweden that never had short-time work policies are turning to them.

It’s useful to compare these programs

The American PPP program and the European STW program are both supposed to keep workers employed. So how do they compare?

Our research shows that the U.S. program is comparatively generous to the firms it helps, paying 100 percent of employees’ earnings up to $100,000. So why has the U.S. program been less effective in reducing unemployment? The answer doesn’t lie in the level of support to individual workers, but in the program’s design and administration.

The PPP program’s design had predictable consequences. The PPP loans are meant to cover both payroll and other operating costs, not payroll on its own. The promise of full loan forgiveness gives firms incentives to keep paying workers — but they can make other decisions about what to do with the funds if they wish. And these companies are confronting other pressing demands. Europe’s STW subsidies, in contrast, only support wages; governments offer other sources of funding for small businesses’ operating costs.

Furthermore, the PPP was rolled out alongside a separate aid package that expanded unemployment insurance benefits, including an additional $600/week of federal support through July. These programs compete. If you are a worker in a small firm, you might be attracted by the security of unemployment insurance benefits that will last for longer than the PPP’s two months. That’s especially true if you are badly paid to begin with, in which case unemployment benefits plus that extra $600/week might give you more money than you would earn if you were employed.

Most important, the PPP program is not administered directly by the government, but through loans channeled through private banks. Putting private lenders in charge of distributing a finite pool of money set off an entirely predictable scramble, creating administrative hurdles and letting banks determine who gets the money and who does not.

In contrast, STW in Germany does not compete with unemployment benefits; it immediately subsidizes wages. That is very attractive to businesses that would otherwise have to give notice before laying workers off and continue paying wages during the notice period, which may be up to seven months.

Moreover, and crucially, STW is a general legal entitlement: The government has to subsidize all firms and workers that fulfill the criteria for support. Unlike their U.S. equivalents, German firms aren’t fighting over a limited pool of funds.

Finally, European countries either had the government infrastructure in place to administer STW, or were able quickly to redeploy existing government offices to run the new program. As a result, they have delivered funds quickly and predictably, unlike the United States, which has had to rely on a private sector workaround. Many U.S. small businesses with thin margins had already laid off workers before PPP kicked in. Those that did not faced a complicated application process and many uncertainties. To what extent would the loan be forgiven? Would the scheme be extended beyond two months? No one knows.

What this tells us is that it isn’t just the size of the assistance package that counts: it is how it is delivered. Over the last several decades, the United States has either shrunk its state capacity or failed to build it, especially around providing social benefits. In Europe, by contrast, governments have enough administrative capacity to deliver comprehensive help swiftly and directly. In fact, President Trump’s Irish resort is among the businesses taking advantage of Ireland’s SWP program.

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