Across the G7, different policy approaches to Covid-19 have led to varying outcomes for national labour markets. Analysis of data two years on from the start of the pandemic reveals the effects of each country’s fiscal approach.
Lockdown measures caused a sharp reduction in GDP for each country in the Group of Seven (G7). Governments across the G7 (Canada, France, Germany, Italy, Japan, the UK and the United States) responded with substantial fiscal measures, spending far more than during previous economic crises. This included rolling out various types of job retention scheme, which has helped shape each country’s labour market today.
The strictness of lockdown measures varied by country and over time. For example, the UK is currently the country with the least stringent restrictions in the G7 (as measured by the University of Oxford stringency index), but it had the tightest reported restrictions at the start of 2021.
New data from the Office for National Statistics (ONS) outline the level of spending and provide comparisons between the G7 countries’ labour markets. Figure 1 outlines the level of spending by each country on fiscal measures to offset the negative impact of lockdown on household incomes. The chart plots the level of spending on non-health measures and forgone revenues in response to the pandemic as a share of 2020 GDP.
Figure 1: Spending on non-health measures as a percentage of 2020 GDP – by G7 country
Source: ONS, IMF
The United States spent the most (at around 22% of 2020 GDP), with the rest of the G7 spending between 7% and 15% of 2020 GDP. These ratios are huge relative to the response to previous economic shocks. For example, the European Commission recommended a stimulus plan of 1.2% of GDP for member countries during the global financial crisis of 2007-09.
But these numbers do not include the impact of automatic stabilisers – the (non-discretionary) increases in transfers and falls in tax revenues caused by a negative economic shock. This means that the percentages shown in Figure 1 may underestimate the extent of government spending across the G7.
What did governments spend money on during the pandemic?
Beyond healthcare, fiscal spending during Covid-19 was targeted primarily at two areas: job retention schemes and wage support; and direct support to households through extended benefit payments and tax deferrals. European countries seemed to have favoured spending more on the former area compared with Northern American countries, which made greater use of the latter.
Job retention schemes, such as furlough in the UK, were part of the response of all G7 countries. The Organisation for Economic Co-operation and Development (OECD) estimates that job retention schemes were supporting 50 million jobs across its member countries by May 2020. These schemes not only aimed to help households maintain their stream of income but were also used ease the bumps as economies were re-opened as the pandemic started to subside and vaccines were rolled out.
What was the impact on G7 labour markets?
During the period from the last quarter of 2019 to the last quarter of 2021, employment levels across all G7 countries apart from France and Canada remained below pre-pandemic levels – with UK employment 1.4% below its 2019 Q4 level.
Within employment statistics, people of working age (15 to 64 years) can be labelled in three different ways: employed, unemployed or economically inactive (not working but not seeking to start or cannot start work). This means that flows out of employment do not necessarily mean flows into unemployment. They can also be made up of flows into inactivity. Flows into inactivity have been particularly large in Italy, the United States and Canada. This is perhaps a result of lockdown measures discouraging people from searching for jobs.
Another possible explanation for the increase in the number of inactive workers may be that the closure of schools has led to childcare pressures on women in the working age population. The extra burden of home schooling, which fell disproportionately on women in the UK, may also have caused more women of working age to withdraw from the workforce, and become inactive.
But increases in inactivity levels have now been reversed across the G7, with the exception of the UK. Analysis from the Office for National Statistics (ONS) finds that this is partly a reflection of older workers leaving the labour market since the start of the pandemic – now that so many near-retirement people have left the workforce, a smaller proportion of those left over fall into this category.
Figure 2: Changes in real household disposable income, annual hours worked per worker, and the employed population
Source: ONS, OECD
Figure 2 reflects different fiscal policies adopted by each country. According to the data, across the G7, employment levels fell most compared with 2019 levels in the United States (-6.2%), followed by Canada (-5.2%) and then Spain (-2.9%).
Turning to the change in hours worked, this fell most in the UK (-11.1%), followed by Italy (-9%) and then France (-7.2%).
Finally, in terms of the change in real disposable income, this actually increased in the Unites States (+6.2%), Canada (+6.8%), Germany (+0.3%) and Japan (+3.8%), but fell in the UK (-0.7%), Spain (-5.4%) and Italy (-2%). Real disposable incomes remain unchanged from 2019 levels in France.
Changes in disposable income are large in countries that focused their fiscal strategy on direct support. For example, the United States and Canada used cash handouts to help households during the pandemic. European countries, which focused on wage support, do not see this strength in disposable income, because wage support schemes will not fully replace workers’ income (the UK’s furlough scheme only paid up to 80% of a worker’s wage).
Notably, the largest falls in employment and in the hours worked per worker come from the United States and Canada, again highlighting the differing outcomes from fiscal strategy.
Protecting both lives and livelihoods was at the heart of public policy across the G7 during Covid-19. Different countries adopted different strategies to protect their labour markets, which placed greater emphasis on either direct transfers or income support. As a result, the impact of the pandemic on various labour market outcomes varied across countries.
In North America, employment fell further but real household incomes were protected. In Europe, the opposite was true, with jobs being protected at the expense of real income levels. Across the board, the share of fiscal spending as a share of GDP was high, with the United States spending the most proportionally.
Where can I find out more?
- The ONS data are available here.
- Previous releases can be found here.
- The Covid-19 Government Response Tracker – or University of Oxford stringency index – is available here.
Who are experts on this question?
- Jonathan Cribb
- Mike Brewer
- Abi Admas-Prassl
- Richard Disney
- Jonathan Wadsworth
- Andrew Aitken
- Stephen Machin