Labour markets in the EU also adjusted to the economic recession through other mechanisms than simply reducing employment levels. Indeed, many Member States took decisive steps to avert the misery of mass unemployment through actions such as extending or introducing short-time work arrangements, or reinforcing measures to support and facilitate transitions to new jobs. Many also increased social protection by extending the coverage or generosity of unemployment benefits or by reinforcing other social benefits(12).
At the same time, many companies made workers redundant only as a last resort and a range of alternative responses were implemented. A common feature was negotiated reductions of working time (‘short-time working’) balanced by increased provision of training. Other responses included reducing labour costs (through pay freezes or pay cuts, or reduced social contributions by employers(13)), paid/unpaid career breaks and, at the aggregate level, an adjustment in the level and composition of employment in terms of temporary, part-time and self-employment(14). In many cases such measures are continuing, although often scaled down from the levels observed during the height of the crisis in early 2009.
Adjustment by type of employment (temporary and part-time employment)Employment adjusted first and foremost to the economic downturn through a sharp contraction in temporary employment, which is the most cyclical component of employment. While in 2008 only 14.0% of employees were in temporary employment, they accounted for almost half (around 44%) of the overall reduction in the number of employees from 2008q2 to 2009q4, the last quarter when temporary employment contracted year-on-year.
In line with the accelerated downturn in overall economic activity over 2008, year-on-year growth in temporary employment became negative in the second quarter of 2008, and turned increasingly so over 2008 and into 2009. By the first quarter of 2009, when the year-on-year fall was greatest, the number of employees in the EU with temporary contracts had fallen by 1.8 million (or 6.9%) compared with the first quarter of 2008, mainly driven by falls in all the larger Member States and most notably by a decrease of over 1 million in Spain. Although the situation subsequently improved somewhat over the rest of 2009, by the last quarter of the year temporary employment still remained around 4% lower than a year earlier. However, temporary employment has seen a very strong recovery over the first two quarters of 2010, returning to positive year-on-year growth rates of 0.5% and 3.4% respectively, with the result that by the second quarter it was down a much reduced 3.1% on levels at the start of the labour market downturn two years earlier and accounted for a more limited 19% of the reduction in employees over that period. Year-on-year growth in permanent employment, which had remained at a relatively stable rate of around 2% over 2008 and has been affected less by the crisis, also came to a halt in the first quarter of 2009 and subsequently turned negative from the second quarter onwards, although contraction has been at a much slower pace (Chart 31). Nevertheless, the fall in permanent employment has continued into 2010, with no signs yet of the strong rebound observed in temporary employment.
For a while, the strong downturn in temporary employment led to a marked reduction in the share of employees in the EU with fixed-term contracts. This share, which has broadly decreased since late 2007, fell to 13.1% in the first quarter of 2009 (down by 1.7 percentage points from the peak of 14.8% in 2007q3) before recovering strongly to 14.0% by mid-2010.
Growth of part-time and full-time employment also adjusted in response to the economic conditions, with a relative shift away from full-time towards part-time work. While the previous strong year-on-year growth of part-time employment in the EU over 2006 and much of 2007 weakened from the second quarter of 2008 onwards, it nevertheless remained positive throughout the crisis and even picked up again over the course of 2009 and into 2010, while growth in full-time employment turned negative from the first quarter of 2009 on and has remained so since. Year-on-year, the rate of growth in full-time employment had dropped to around –3% over the latter half of 2009 before recovering somewhat over the first half of 2010 to -1.3%, while for part-time employment year-on-year growth had improved to post rates of around 2% from late 2009 onwards.
This suggests that the decline in full-time employment has been partially offset by a continued increase in part-time employment, demonstrating the potential role of part-time work as a ‘shock absorber’ during the economic downturn. Indeed, one of the steps an employer can take in order to avoid having to lay off (more) people in a downturn is to introduce part-time working or increase its use i.e. transform a full-time contract into a part-time one. Similarly, employers may well demonstrate a stronger preference for part-time contracts when looking to hire new staff, especially in the initial stages of the economic recovery. Thus, some of the adjustment in total hours worked during the crisis can be explained by a shift from full- to part-time work.
Working hoursReductions in working hours in order to adjust to the fall in demand were very much in evidence during the recession. This reflects the fact that, firstly, labour hoarding has been a widespread response of many European firms which have preferred to keep their experienced workers, and secondly, that government sponsored short-time working schemes(15) have been widely used. In some European countries, such schemes have been reinforced or introduced for the first time. The practice of promoting reductions in working time rather than laying off workers has helped protect European jobs from the initial impact of the recession and to avoid the sharp rises in unemployment seen in the USA.
Germany, which has compensation programmes in place through which employers can apply for temporary state assistance to top up the wages of workers working reduced hours, provides a clear illustration of the important role that public authorities have played in facilitating firms’ recourse to short-time working during the crisis. In the last quarter of 2008 the numbers of short-time workers in Germany rose dramatically and this continued into the first part of 2009, with the result that by May 2009 the number of recipients of short-time working allowances had risen to around 1.5 million, much higher than in previous years (Chart 32). Although the figures have subsequently fallen, there were still over 800 thousand recipients of allowances in December 2009, which is around half the peak in May 2009.
In several other countries partial unemployment benefits have
played a
similarly important role. These act in a similar way to short-time
working allowances, providing income support to those whose hours of
work are reduced because of a downturn in the economy and enabling them
to remain in employment rather than become fully unemployed. This
scheme has been particularly important in Belgium, where it has played
a major role in moderating the rise in ‘full’
unemployment
(Chart 33).
Just how important such measures have been in certain Member States at the height of the crisis can be seen in Charts 34(a) and 34(b), which show the share of the overall reduction in total hours worked (i.e. total labour input to the economy) between 2008 and 2009 which can be attributed to the reduction in hours worked per person in employment (as opposed to reductions in the number of employed i.e. headcount employment)(16). Adjustment through reductions in hours per worker between these two years was the main reaction in countries such as Austria, Belgium, the Czech Republic, Italy, Slovakia, and especially Germany (where it accounted for almost 100% of the reduction in total hours worked), but was also substantial in most others. Even in countries where no formal short-time working schemes exist, such as Sweden, a significant amount of the adjustment took place through a reduction in the hours worked per person, reflecting a much greater use of internal flexibility by employers in this crisis compared to previous recessions. Even so, in countries such as Denmark, Ireland, Latvia, Lithuania, the Netherlands and the UK the fall in the total number of hours worked was due much more to reductions in employment. In Bulgaria, Portugal and Spain all adjustment was via employment, as average hours per worked increased slightly. For the EU as a whole, the reduction in hours per worker accounted for around 40% of the reduction in total hours worked, compared to around 25% for the US.
…in the industry and construction sectorsAs highlighted previously, much of the decline in economic activity during the crisis occurred in the industry and construction sectors, which have seen especially sharp peak-to-trough contractions in output of the order of 15-20%. However, although these sectors have seen relatively strong associated reductions in employment, it is also the case that there have been strong adjustments through reduced working hours, which has acted to cushion workers from even higher job losses.
In line with the relatively strong fall in the production indices after the first quarter of 2008, there was an almost immediate change in the indices of hours worked and of persons employed (Chart 35). In industry, total working hours declined at a much faster rate than employment from the third quarter of 2008 through to the first quarter of 2009, implying a substantial adjustment in the sector in the initial phase of the crisis through reducing working hours as opposed to laying people off. As a result, over the four quarters following 2008q1 the total decline in the index of hours worked was stronger than the decline in the index of persons employed (down 7.4% and 5.0% respectively), supporting the view that employers first reduced hours before making redundancies. However, from the second quarter of 2009 onwards the situation reversed, with further, although generally more limited, employment declines exceeding the falls in total hours worked. This might suggest that retained workers are now having their hours extended relative to the previously reduced levels, at the same time as labour shedding continues, and indeed by the second quarter of 2010 total hours worked had started to increase again despite continued employment losses. By the second quarter of 2010, the falls in both indices compared to the peaks in early 2008 were broadly similar, with the index of hours worked down 10.3% and the index of persons employed down a slightly stronger 11.5%.
In construction the trend has been somewhat different. In general (except for 2008q3) the decline in the index of hours worked over the four quarters following 2008q1 broadly matched the decline in the employment index (by 2009q1 they were down 6.3% and 6.7% respectively), indicating that the immediate response in the highly labour-intensive (and relatively low productivity) construction sector was rather to lay people off. However, from the second quarter of 2009 onwards, total hours worked fell much more substantially than employment, suggesting that, while job losses have continued, more emphasis has been put on reducing average working hours to cope with the reduced level of demand. As a result, by the second quarter of 2010 the index of hours worked was down almost 19% while the index of persons employed was down a more limited 14.3% compared to their respective highs in early 2008.
Focussing on the industry sector in more detail, in almost all industrial activities (at the NACE Division level), both of the labour input indices declined over the first year of the labour market downturn in the EU to the second quarter of 2009 (Chart 36). There were few industrial activities that appeared relatively robust in the face of the downturn.
The greatest falls (between about 12% and 14%) in the index of persons employed during this period were in the manufacture of textiles, wearing apparel and leather products. These activities have been in decline for a number of years, both during the build-up to the abolition of the Agreement on Textiles and Clothing at the end of 2004 and the subsequent abolition of textile and clothing import quotas. The economic downturn since early 2008 appears to have accelerated the ongoing re-structuring of businesses in these activities.
In the vast majority of industrial activities, the rate of decline in total hours worked during the year to the end of the second quarter of 2009 was stronger than the decline in persons employed. This was particularly the case in the manufacture of motor vehicles and trailers (where the index of hours worked declined by around 16%, a considerably stronger rate than the 9.7% reduction in persons employed), together with related upstream activities (e.g. manufacture of basic metals, electrical equipment and fabricated metal products).
In a number of respects the automotive sector was a showcase in terms of its adjustment to the crisis through working time flexibility. Many of the large automotive companies, especially in western European Member States, extended scheduled seasonal closures over Christmas 2008/New Year 2009. Even after the resumption of production in 2009, many firms announced temporary plant closures during the year. The reduction or elimination of overtime and nightshifts was also a common response, as was compulsory leave-taking where workers were obliged to take annual leave entitlements in periods specified by their employer (often in conjunction with temporary plant closures). Furthermore, either in combination with or in addition to many of the above measures, the use of obligatory periods of unpaid leave and shortened working weeks was widespread.
Over the second year of labour market retrenchment (i.e. from 2009q2 to 2010q2), however, there was rather less evidence of working hours reductions continuing to be used to soften the declines in employment. Moreover, firms are now increasingly focused on improving their competitiveness, and in certain industry sub-sectors have started to increase the working hours of the employees they have retained. Across most industry sub-sectors, the rate of decline in total hours worked during the year to the end of the second quarter of 2010 was weaker than the decline in persons employed, and in some cases total hours worked had even increased. This was even the case in the automotive sector, and perhaps suggests that the limits to softening the impact of the crisis on employment through working hours adjustment may have been reached, and that any further deterioration in the labour market is now being enacted almost entirely through labour shedding.
(12) | See section 5 of Chapter 2 for more details on changes in the coverage and generosity of unemployment benefits. |
(13) | See section 3.3 of Chapter 2 for more details on cuts in non-wage costs. |
(14) | See section 3.5 of Chapter 2 for more details on measures promoting selfemployment and business start-ups. |
(15) | In a number of EU Member States, measures are in place to provide support for a reduction in hours of work at times of downturns in economic activity in order to moderate the effects on employment. These measures include partial unemployment benefits, paid to those who work a reduced number of hours or days a week, and temporary support for short-time working, paid to employers to enable them to maintain jobs at times of reduced demand for their products. The latter has been particularly important in Germany during such periods. For more details on short-time working arrangements see section 3.1 of Chapter 2. |
(16) | Working hour reduction do not, however, only reflect the impact of government financed short-time working schemes but also mechanisms and institutions already in place for firms to reduce employees hours without government intervention (for example as already existed in Germany) |