Should We Insure Workers or Jobs During Recessions?

In the wake of the COVID crisis, labor market policy responses on both sides of the Atlantic have been immediate, absolutely unprecedented in scope-and also diametrically opposed in nature. To put it simply, the focus of the US labor market policy response was on insuring the income of workers against the cost of job losses. This was done by aggressively increasing the generosity of unemployment insurance. In Europe, the emphasis was on preserving the relationship between workers and firms, which translated into generous subsidies for hours reductions and temporary layoffs through short-time work or related schemes. Panel A of Figure 1 gives a visual representation of these polar strategies. In the United States, the fraction of the working-age population on unemployment insurance benefits surged from about 2 to 12 percent in April 2020, and, although it declined very quickly after that, at the end of 2020 it was still higher than at the peak of the Great Recession of 2007-09. If we look at the weighted sum of the four largest European economies-Germany, the United Kingdom, France, and Italy-the increase in the number of unemployment insurance recipients was very limited, but take-up of short-time work skyrocketed, with more than 16 percent of the working-age population enrolled in this type of scheme in April 2020. There was no such increase in short-time work take-up in the US economy, although about 25 US states have operational work-sharing schemes similar to short-time work.