Assessing a policy experiment - labor market response to Covid 19

US and Europe adopted contrasting responses to protecting the labour market in the aftermath of the pandemic. Reflecting their social democratic approach, the Europeans responded with supporting businesses retain people through wage-sharing programs. In contrast, the Americans, again reflecting its market-based businesses know best approach, allowed businesses to lay-off workers and in turn directed cash transfers to them. 

Bloomberg has an excellent article which appears to shows that the European policy was superior to America's flexible policy choice. The summary below. 

The US unemployment rate surged to 14.8% in April 2020, compared to the European peak of 8.6%. Further, the US payrolls dropped by more than 22 million in March-April 2020, and nearly half of jobs in leisure and hospitality vanished. The European policy resulted in lower unemployment...

... quicker and greater rebound in employment...

... and superior recovery in unemployment rate (and hysteresis in recovery).

At its peak, the European furlough schemes supported 32 million jobs in April 2020, which tapered off to about 4 million by September 2021. 

In terms of costs, the top five European economies have spent so far about €196 billion ($230 billion)—or 1.8% of their combined 2020 GDP. 

The costs of US response has been much higher, slightly more than double the European cost

U.S. states paid out about $790 billion across regular unemployment insurance and federal benefits in the 17 months through July 2021—or about 3.7% of U.S. 2020 GDP. That figure includes the jobless aid programs created at the start of the pandemic, such as the one for those not traditionally eligible for assistance including self-employed workers.

The US approach leads businesses to quickly shed workers, whereas their re-hiring will be much slower. There is an asymmetricity in retrenching and rehiring. Businesses see retrenchment as an opportunity to increase labour productivity either by reducing their workforce or rehiring some other more productive workers. Besides, the retrenchment approach leaves long-term scars among unemployed workers and results in social instability. 

The theoretical basis for the US approach is that businesses and workers know best what's in their interest.  Lay-offs allow both sides to respond better to the emergent situation - businesses by focusing on automation, productivity improvements, or revisiting their business lines and/or models; and workers to re-skill and shift out of disrupted sectors. Governments should step in only to cushion the laid off workers, and that too only to the extent of helping them find their next job. The central assumption is the faith in  the aggregate outcome of individual agents' independent decisions.  

The problem with this thinking is that information asymmetry and human cognitive biases prevent workers and business executives from knowing what's in their best interests. And even when they know what to do, their agency to decide and execute is limited or constrained. Further, when faced with such circumstances, the inexorable dynamic of free-market capitalism leads businesses to trade-off resilience in favour of efficiency, and undertake unconstrained substitution of labour with automation. Finally, such episodes throw up uncertainties about the future which workers (and even businesses) are not well-placed to bear, and therefore have to be managed by governments through public policy.  

In simple terms, the market frictions are too much and too entrenched to be overcome merely through the pursuit of individual agents working to further their interests. 

Update 1 (08.01.2022)

Jerry Hultin informs that the US had Payroll Protection Program (PPP) and Employee Retention Credit (ERC), though framed as loans were almost always forgiven, thereby being turned into subsidies or gifts to employers. The first, in particular, was a large program. 

This introduces a layer of complexity in drawing inferences. It would need to be analysed how much of these programs were disbursed and its effects (directly in terms of workers not being laid off, or indirectly in terms of loans forgiven), compared to the direct cash transfers to people.