Covid-19 one year on: 1.8 million additional long-term unemployed in Europe

First out, last in: No rapid return trip into employment for the jobless – expect long-term unemployment to increase 38% in 2021. The vast majority of workers that lost their jobs in H1 2020, or were already unemployed before that, will struggle to return into employment over the coming 12 months. After all, as the Eurozone economic recovery starts to unfold from the second quarter of 2021 onwards, firms will prioritize reabsorbing furloughed workers (by increasing their working hours) over hiring new ones. With broad-based hiring unlikely to take-off before 2022, re-employment prospects for those searching a job (13.7 million as of December 2020, 1.8 million of which have been added since February – leaving out the “hidden unemployed” i.e. workers that have dropped out of the labor force) remain dim. As a result, we expect long-term unemployment to rise +38% above pre-Covid-19 levels in 2021 — from an estimated pre-crisis low of 4.8 million people in Q1 2020 to 6.6 million in Q3 2021 before slightly leveling off in Q4 2021 to 6.5 million.

Mind the risk of a jobless recovery: Structural headwinds may further complicate reemployment prospects even after labor markets are defrosted as the pandemic has forced digitalization on Europe. Long-term joblessness can serve as a proxy for structural unemployment. After all, prospects of reemployment steadily reduce with the duration of unemployment due to, among other factors, the negative impact on a person’s skills. The Covid-19-shock has accelerated structural changes in the economy, which in turn are likely to fuel the mismatch between workers and job profiles. In particular, we find some evidence that labor productivity may have been boosted by the Covid-19 shock. While it is still early days, one interpretation could be that the pandemic forced digitalization on Europe, with widespread remote working and an increased degree of automation in production being potential drivers of a productivity boost. With job losses in 2020 largely centered on routine occupations, we see the risk of Europe following in the footsteps of the US, where “jobless recoveries” and rising “job market polarization” have arguably already become the new norm in the context of a higher rate of technological adoption.  What initially looked like cyclical job-shedding in the Eurozone may turn out to become a structural problem, with negative repercussions on reemployment prospects for jobless workers, as well as resulting in the rise of “zombie jobs”.


Katharina Utermöhl
Allianz SE