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The research points out that just because [governmental] fiscal support appears to have reduced the labor-participation rate doesn’t mean it has been bad for the economy. Can you explain why that is?
Daan Struyven: It’s true that the participation rate’s recovery has probably been a bit slower as a result of fiscal support—that’s what our findings suggest. At the same time, I don’t think it’s obvious that there has necessarily been a negative impact on broader measures of wellbeing.
Fiscal support really allowed people to replace the income that they lost from not working. You had a replacement of labor income with transfer income. And that allowed people to continue to consume, which in turn supported labor demand. You avoided, if you want, a negative feedback loop.
Goldman Sachs research signals that the form of labor support also partly explains why the labor supply in the U.S. has lagged behind some other countries. Can you explain why that is?
Daan Struyven: Between the U.S. system, where you replace income through unemployment benefits, and the European system, where, essentially, workers stay on the payroll, but the government pays around 80% of your prior wage while you work not at all or work reduced hours, the one thing in common is that the two systems provide income replacement. The key difference is: do you maintain the relationship between the worker and the firm?
In the U.S. case, people are unemployed and the relationship is at least temporarily broken. Whereas in Europe or other countries, for instance Japan or Australia, the relationship was intact. And so that meant when demand rebounded and when activity rebounded it was easier for workers to pick up the work at their employer where they were still on the payroll. Empirically we find that the system where a lot of workers stay on the job-retention schemes is associated with better labor-force participation performance.
For more from Daan Struyven on workforce participation, read the full interview.
This article was originally published on goldmansachs.com.
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Updated for tax year 2022