What’s working to stem COVID-19 job losses?

Denmark’s ‘robust’ economic subsidies kept nation’s unemployment under 6 percent

Merritt Melancon | Jun. 29, 2020

The United Nations projected in April that 2.7 billion workers around the world — four out of five employees globally — will have their work lives disrupted by efforts to stop the spread of the COVID-19. 

It’s a massive number of people and that disruption looks different depending on nationality, profession, government intervention and myriad other factors. Terry College of Business labor economist Ian Schmutte has been poring over the numbers trying to understand how this disruption is affecting labor markets.

In a paper published earlier this month in the Centre for Economic Policy Research's special issue on “COVID Economics,” Schmutte worked with economists in the United States and Denmark to gauge the success of corporate support measures meant to keep the economy — which follows the Nordic welfare model — afloat during the pandemic.

“Denmark was interesting from an economic perspective because they had a very robust government response,” Schmutte said. “It froze employment relationships and just put the economy on pause. We wanted to see how effectively that operated in a country that pursued that policy very vigorously and already uses those sorts of policies to deal with the more normal economic shocks.”

Schmutte and his co-authors surveyed 10,000 Danish firms of various sizes for the research project.

Companies that lost more than 35 percent of their revenue were eligible for fixed subsidies, tax relief and labor subsidies. Schmutte and his coauthors found a strong correlation with the uptake of government aid programs and avoiding layoffs, with firms who applied for labor aid seeding the fewest layoffs.

These programs kept 81,000 people from being laid off at the end of April. In a country with only 2 million people working, Schmutte said the subsidies achieved their aim by keeping 4 percent of the total workforce employed. The overall unemployment rate for Denmark at the end of April was 5.4 percent.

Another program paid 75 percent of the salary of furloughed workers. It was successful in helping firms abide by public health recommendations while staying afloat, which may have had a more substantial impact in slowing the spread of COVID-19 in Denmark while protecting the economy.

“The headline seems to be that the policies were successful,” Schmutte said. “The whole package reduced layoffs by about 80,000 and increased furloughs by more than 200,000. That means that the policy was effective at saving jobs, but it also encouraged firms to pay people to stay home — which was important, especially at the beginning of the outbreak.”

The study also found that labor supports and supports for businesses’ fixed costs were more effective at protecting jobs than larger-scale fiscal supports like tax breaks.

This study represents the first leg in what is sure to be a more in-depth analysis of government responses to the COVID-19 pandemic. Schmutte expects future studies may involve comparisons of outcomes in countries with different types of public policy interventions.