This is a summary of an article by Gavyn Davies that appeared in the FT on 19 May 2020. The full article can be found here:
The flexibility of the US labour market is
often viewed as one of the main reasons for the long term success of the
American economy, compared to that of Europe, both in terms of asset market
returns and growth in potential GDP. However, the policy responses to the
labour market shocks caused by the supply lockdowns to control Covid-19 may
change these perceptions.
The lockdowns have actually had a smaller direct impact on output in the US
than in the EU and UK, but the initial effect on recorded unemployment will
be much larger in America. This is because the fiscal support for the
labour market has focused on entirely different objectives.
In the US the emphasis has been on replacing lost income for displaced
workers, while in Europe the focus has been on subsidizing wages in order
to keep workers attached to their employers, although vast numbers of them
have been furloughed or placed on short time work.
If the lockdowns prove to be fairly short lived, it is likely that the
labour market in Europe will return to normal more rapidly than in the US,
which is why Fed Chairman Powell is so worried about a structural increase
in unemployment in his country.
Ironically, the greater flexibility in the US labour market, exacerbated by
the policy response chosen by the federal government, may not speed the
recovery in the economy from the Covid-19 shock.
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