Here's why the US still has one of the highest jobless rates among developed countries

While the U.S. unemployment rate dropped last month — surprising many economists — it’s still vastly higher than the jobless rates of other developed nations that have also endured coronavirus outbreaks and mass shutdowns of their economies.

The stark contrast underscores the different labor policies these countries pursue for workers who find themselves jobless and could determine how quickly their economies may bounce back.

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The April unemployment rate in the U.S. was two to five times higher than the rates in Australia, Germany, South Korea, Israel, and Japan the same month, according to OECD data that's available for April and analyzed by a new paper by Schmidt Futures and UC Berkeley economists.

Canada comes closer with a 13% unemployment rate. Even accounting for the May decline to 13.3% in the U.S., the story remains the same.

Slower recovery?

It may take longer for the U.S. job market to return to where it was before the pandemic with the U.S. experiencing the highest January-to-April rise in unemployment rate compared with other OECD countries, the paper found.

“To some extent looking at the international comparison right now isn’t going to tell us a huge amount, because the economic policies show differently in the unemployment rate,” said Martha Gimbel, manager of economic research at Schmidt Futures and a co-author of the paper. “But it’s a reminder we need to look at economic comparisons as we complete our way out of this crisis.”

Countries such as Germany and Japan have relied strongly on work-share programs to mitigate the economic fallout of the pandemic, while the U.S. has relied on expanded unemployment insurance to support its workforce, which leads to higher unemployment rates. The work-share programs reduce unemployment by allowing their employers to temporarily reduce the hours of their employees.

“If we had focused more on work-sharing, there would be millions of workers who are still connected to their employer who wouldn’t be worrying about what’s going to happen at the end of this,” Gimbel said.

Germany, Japan, South Korea, Australia, and Israel lost between 0.7% and 4.4% of their employment. In the U.S., those rates would have meant 18 to 24 million fewer jobless individuals.

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But the unemployment insurance model gives workers flexibility to receive benefits while searching for their next job.

“But that’s only true if they still have that support for the duration of this pandemic,” Gimbel said. “If we pull that support in the summer, it’s not going to work.”

Personal income is up, but for how long?

Income data in the U.S. has had a more positive outlook than the unemployment rate with personal income increasing by more than 10%, according to the Bureau of Economic Analysis. This gain was largely driven by the stimulus payments and expanded unemployment benefits, so personal income will be negatively affected once they expire, according to Gimbel.

“If we’ve decided that we’re doing this through the unemployment insurance program and we didn’t build up the type of structure to do it properly and then the program expires, that’s going to be a real trouble,” she said.

With over 42 million Americans having filed for unemployment insurance in the last 11 weeks, many have struggled to get their benefit for weeks. For every 10 people who successfully filed, three to four additional workers could not get through the system and make a claim, while two others didn’t try because it was too difficult, according to an April survey by the Economic Policy Institute.

“It’s not just that we have decided to do things through the unemployment insurance program, which — to be clear — is a very reasonable way of doing things,” Gimbel said. “But we’ve also created additional pain because we haven’t completely invested in that program and people have been really delayed in getting their benefits.”

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The additional $600 of unemployment benefits that workers get under the CARES Act is set to expire at the end of July. If it’s not extended, the positive impact on people will quickly disappear, incomes will likely plunge and food and housing insecurity will increase, according to Gimbel.

Some Republicans have said that more coronavirus relief is unnecessary after the unexpectedly positive May jobs report which may mean that the extension of these benefits as a part of another stimulus package may not be warranted.

Work-share programs

In the U.S., work-share programs — known as short-time compensation — do exist in 27 states. But they are rarely used. In the week of April 18, only 88,000 or less than 0.1% of workers were covered by short-time compensation, according to the Schmidt Futures and UC Berkeley paper.

“European countries, Japan, and others have been more aggressive about keeping people employed through work-share or through something like the PPP programs,” said Susan Houseman, research director at the W.E. Upjohn Institute for Employment Research, referring to the forgivable small business loans the government is providing. “There's no reason why the work-share program couldn't be used for that purpose in this country.”

In the U.S. work-share program, the employer chooses to cut hours, instead of laying off workers, by setting up a formal workshop program with the state. The program provides those employees access to their unemployment benefits and lets them keep their job. They also get the additional $600 in pandemic aid. Additionally, employees who are on a work-share program still receive their retirement and healthcare benefits.

Benefits of work-share programs on unemployment

Keeping employees attached to their employers in this way helps to keep long-term unemployment low and gives employees more security, according to Houseman.

“When you have people who are unemployed for prolonged periods of time, there can be something called the ‘scarring effect’ of long-term unemployment,” Houseman said. “People who are unemployed for a long period of time, on average, have trouble finding new work, even when the economy recovers, and many of them experience permanent declines in income.”

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Critics of the work-share program say that it delays inevitable layoffs. But it also puts workers in a better position to find a new job even if their current role is about to disappear, Houseman said. Workers are in a better position to find a new job if they were recently working versus being out of work for months.

“You float your resume and you've been out of work for six months to a year, it’s very hard to get back in to find a new job,” Houseman said. “You're just at the bottom of the queue in terms of other people that employers are looking at.”

Denitsa is a writer for Yahoo Finance and Cashay, a new personal finance website. Follow her on Twitter @denitsa_tsekova.

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