In March, the German labor market appeared initially unaffected by the Covid-19 induced economic crisis, with unemployment posting a small decline compared to the previous month. But don’t be fooled by the latest figure, which looks like “the calm before the storm”: The German labor market miracle is about to come to an abrupt end.
With the cut-off date for the latest labor market statistics being March 12, they do not yet reflect the increasingly aggressive containment measures introduced over the course of March. A sharp rise in German unemployment in April and May is hence more than certain. The real extent of the economic disruption, however, will be visible above all in the number of workers on Kurzarbeit, i.e. shorter working hours, which in the coming months should far outpace anything observed during the great financial crisis. Already in the second quarter of 2020, not only the mid-2009 peak of 1.5 million but also the recent government estimate of 2.35 million workers on Kurzarbeit could be surpassed. In fact, we estimate that the sharp economic setback in H1 2020 could put up to 12 million jobs at risk in Germany.
The extent of labor market deterioration is closely tied to the length of the lockdown period.
In order to slow down the spread of the Covid-19 virus, German economic activity has largely been put on pause. A sharp - but comparatively more temporary - recession à la 2008/09 will be unavoidable, but the length of the lockdown will determine the setback for economic growth as well as the labor market. Drawing on the experience of China, in our baseline scenario, we modeled the economic shock with a one-month as well as a two-month full lockdown and, assuming containment measures are successful, a partial, u-shaped recovery thereafter. After all, while some catch-up effects are certain, economic actors are likely at first to consume and invest with an extra degree of caution, while some supply chains may need to be repaired. We also took into account the mitigating effects of policy bazookas.
Table 1: German unemployment under different economic scenarios