Why is the unemployment rate in the euro area so low despite the crisis?

The eurozone is currently going through the worst economic crisis in its history. After economic output in the first quarter fell by 3.6 percent compared to the previous quarter, the lockdown measures are likely to result in a double-digit decline in the second quarter.

In view of this, enormous stress is also to be expected for the labour market in the currency area. But according to the latest press release from Eurostat, one is already rubbing one’s eyes in disbelief. According to this, Eurostat estimates the unemployment rate in May at 7.4 percent. This represents an increase of only 0.2 percentage points compared to March. Thus, the severe recession has so far passed almost without leaving its mark on the labour market. How can that be?

In addition to the use of the instrument of short-time work at European level, which at least partially protects the labour market from direct job losses, another explanation lies in the definition of unemployment used by Eurostat. The statistics authority writes about this:

„These estimates are based on the standard definition of unemployment used worldwide by the International Labour Organisation (ILO), which defines unemployed people as those who have actively sought work in the last four weeks and are ready to start work within the next two weeks. The COVID-19 restriction measures introduced in April 2020 have led to a sharp increase in the number of applications for unemployment benefits across the EU. At the same time, a significant proportion of those who had registered with employment services were no longer actively looking for work, for example because of the restriction measures or because they were no longer available, for example to look after their children during the lockdown. This leads to discrepancies in the number of registered unemployed and those who are classified as unemployed according to the ILO definition“.

And these discrepancies are likely to be significant in the current situation. This is shown, for example, by the data for the German labor market. In addition to the Eurostat rate, there is also the national unemployment rate, which is calculated by the Federal Employment Agency. And while the Nuremberg rate rose by 1.3 points from 5.0 to 6.3 percent between March and May, the ILO rate increased by just 0.2 percentage points (from 3.7 to 3.9 percent).

The effects of not counting people who are not looking for a new job in the short term can also be seen in the example of Italy, where the unemployment rate fell from 8.2 to 6.6 percent between March and April due to the lockdown. In May it then rose again to 7.8 percent. At the same time, however, employment fell between March and May, namely by around 1.3 million people. Actually, the unemployment rate should have risen more strongly with such a massive employment adjustment.

In view of the current low rate, we should not allow ourselves to be blinded. Under these circumstances, the Eurostat figure on unemployment unfortunately makes no contribution to understanding the real situation on the European labour market. At present, economic observers would do better to use national unemployment data or employment statistics.

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