The United States recovered 4.8 million jobs in June, adding to May’s 2.5 million jobs rebound.
The U.S. employment recovery is faster and stronger than the one in the eurozone, which has more than 40 million workers on subsidized furlough programs, added to a 7.4 percent unemployment that’s expected to rise to 11 percent by September.
Considering these factors, the trend shows that the U.S. unemployment rate would fall to 8.5 percent, with a labor force participation rate of 63 percent, at the end of this year, according to my estimates. Goldman Sachs has improved its unemployment rate outlook to 9 percent for 2020, from 9.5 percent a month ago. However, at this rate, the United States would only recover from the 2019 record-low unemployment at the end of 2021. Still, much faster than the eurozone.
Subsidized furlough arrangements, as the eurozone economies are implementing, are costly and generate extraordinarily little impact on consumption. Government spending is rising at the fastest pace in decades to include the increase in health care costs, the unemployment insurance expenses, and the subsidized furlough programs. However, workers under these plans know that their positions are at risk and are deciding, wisely, to save as much as they can. Almost 10 percent of the labor force in the major European economies is under one of these programs, which are designed to help businesses navigate the crisis without letting go of employees.
How can economies recover the lost employment and continue to create jobs? Unfortunately, many governments would have to do the opposite of what most developed economies are doing. They should stop bailing out zombie firms, as those already had overcapacity in the past five years and are not going to hire more workers soon. Governments should also reduce unnecessary spending to prevent deficits from rising to unmanageable levels, then having to increase taxes that would reduce investment and job creation. Bloated public budgets aren’t going to bring employment back; they didn’t work in the eurozone in the 2009–2012 period, and they won’t work elsewhere.
The U.S. government has taken a more effective approach by combining some demand-side measures with more efficient supply-side policies that have supported the job recovery, even if it’s still weak. There’s a long and painful road ahead, and the rising number of COVID-19 cases may harm the economic recovery as lockdown risks return.
Some commentators in Europe have argued that the job recovery in the United States is stronger due to a larger fiscal and monetary stimulus, which couldn’t be further from the truth. The European Central Bank balance sheet is now 52.8 percent of gross domestic product (GDP), or 6.2 trillion euros. It started the year at 39.4 percent, or 4.6 trillion euros. By comparison, the Federal Reserve’s balance sheet is 32.6 percent of GDP.
Fiscal stimulus is also much smaller than in eurozone economies. The U.S. fiscal impulse is equivalent to 5.2 percent of GDP, compared to 38 percent in Germany, 30 percent in Italy, 23 percent in France, and 10 percent in Spain.
The reason the U.S. economy is improving faster than that of the eurozone is its more dynamic and flexible labor market, with more resilient businesses. That doesn’t take away the important challenges of the United States, which lost 7.9 million jobs in hospitality and leisure, according to the Bureau of Labor Statistics, and the service sector, which saw the biggest employment reductions.
If the United States wants to surprise the world with a much quicker return to record employment, it needs to address the permanent job loss figure with tax incentives to hire faster, and the continuing jobless claims with a robust and effective set of policies that strengthen business creation and allow existing ones to grow, particularly in digitalization and added-value online services for global customers.
At the current pace, the eurozone won’t return to 2019 employment levels until 2023, and in the case of the United States, at the end of 2021 or first quarter of 2022. That’s not soon enough. The global economy may fall back into a recession if the conditions for strengthening the labor market and business creation aren’t introduced rapidly.
Governments will have to liberalize the labor market, cut red tape, eliminate harmful overregulation, and provide a stable and helpful framework for businesses to start and grow, or they will find themselves in a deeper crisis than feared.
