COVID-19 and Europe Economic Scars for Decades to Come

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Jugendliche sitzen auf einem Baum am Weißensee. Berlin, Deutschland, 10.04.2020.

Companies in Germany were practically begging 20- to 30-year-olds to come work for them. Then came the coronavirus, destroying health, lives and jobs. It will take decades for this generation to catch up economically.

By Markus DettmerFrank HornigAnton RainerThomas SchulzGerald Traufetter and Robin Wille

Perhaps it’s just this diffuse fear of the future that seems to lie over the country like a fog, but sometimes Yavuz Dașkin worries that everything was in vain: the six years of study at universities in Giessen and Hamburg, the semester abroad in Oslo, half a dozen internships. He finally wanted to start his career and write his master’s thesis while working in a company this fall. He has written application letters to a number of companies, but has received one rejection letter after the other, and the response is always the same: There are no more jobs for students because of the coronavirus pandemic. “I have to completely rethink things,” Dașkin says.

Similar stories from students leaving high school or university are everywhere these days. Of the cancelled traineeship at the travel agency, the cancelled trainee post in event marketing, of the future hotel management trainee who nobody needs right now. Or of the engineer trainee who isn’t getting that dream job at German flag carrier Lufthansa. Of the non-university prep high school graduates who are in a state of panic because very few of them are landing training positions.

This year, a half-million students will graduate from university in Germany. They are entering a labor market that is “essentially frozen,” says Detlef Scheele, the head of the Federal Employment Agency. At the end of the summer, more than a half-million vocation trainees were hoping to begin apprenticeships, but nobody knows how many spots will still be available. Scheele is urging companies to continue with their trainee programs at all costs. “We can’t have a lost corona graduating class of 2020,”  he says.

But in the face of the biggest economic slump seen in Germany since World War II, that will be extremely difficult to avoid.

It’s a seemingly absurd turn of events for a generation that grew up in an era of what appeared to be a never-ending economic boom, a golden decade in which the German economy never stopped growing. An economy that had the lowest unemployment rate in history, a shortage of skilled workers and a surfeit of jobs. Prospects looked a lot better only a few months ago: You could head abroad after graduation and travel around the world and then, at some point, find a job, maybe even just a half-time one.

Or why not take the risk of founding a start-up? Or just earning a little bit less and having more fun at work? Or creating a new working world – one more mobile and more global? Why not do that online marketing job from a co-working space in Shanghai? The world was open.

Corona Has Hit all Industries and Workers

But that’s a thing of the past now. The coronavirus crisis is hitting all industries and all workers. In the long term, it will likely be the young who suffer the most in the aftermath. That was true once before during the financial crisis of 2009, but it is even worse this time around: Around 750,000 companies have already placed employees on government-subsidized work furlough programs. In that environment, who is going to create apprenticeships and take on trainees? How many companies are going to hire inexperienced newcomers when they are in the process of eliminating jobs? Almost one-third of all 20- to 30-year-olds in Germany are employed under limited-term contracts. And they are often the first to be shown the door.

There still isn’t any final data from government job-placement agencies or personnel departments, but there are clear indications of what’s happening. According to one recent survey, one out of four skilled craft enterprises plans to offer fewer trainee spots. An analysis from the Boston Consulting Group found that the number of entry-level job offers for “young professionals” shrank by almost 40 percent between the beginning of March and the end of April. Almost 10 percent of workers under 25 have lost their job because of the pandemic in the last four weeks, a study by Cambridge labor market researcher Christopher Rauh found.

We’re also experiencing a moral crisis. It affects millions of young people who, only weeks ago, had defined saving the planet as their primary goal. They called for a more sustainable economy, fairer capitalism and climate-friendly companies, even if that meant it might cost a few jobs here and there. They strove to become the Greta Thunberg Generation. But now they may be doomed to becoming the Coronavirus Generation, one that can no longer afford to radically curb growth. Who’s going to protest for less prosperity if they have to sacrifice their own professional future for it?

“The Young Pay Double”

Especially given that it’s not just a matter of one or two difficult years. Past crises have shown that people who enter into the labor market in a recession have to expect low wages and a slower career over the long term. Economists call this effect “economic scarring,” and it has been the subject of considerable research since the last financial crisis. That research has shown that the traces are still visible in the people affected for decades to come.

This is also the danger that Hamburg college student Yavuz Dașkin is facing. If he isn’t able to write his master’s thesis from a position inside a company, it will diminish his qualifications, decreasing his chances of getting hired and place downward pressure on his starting salary. He’s already thinking about taking “any job,” regardless of his major. “The main thing is security,” he says.

Prospects are similarly bad for the next graduating classes. If school is cancelled for several months, students usually can’t make it up. Education researchers speak of a “reduced living income.”

At the same time, the very generation that is getting caught up in the consequences of the crisis is the one that is going to get stuck paying for it. This year alone, the German state will incur 366 billion euros in new public debt. “The young pay double,” says 31-year-old entrepreneur Tarek Müller. “The crisis now has the potential to set in motion a an even bigger movement.”

Because how is this all going to end well? On the one hand, there are the golden years experienced by the baby boomers with their steadily increasing prosperity, who are leaving behind a planet shaken by climate change and huge mountain of debt. On the other, you have the Greta/Coronavirus youth, who will have to pay everything off with lower overall incomes while at the same time trying to maintain sustainability to keep the planet from hitting the tipping point. In other words, there is plenty of fodder for the kind of conflict between generations that hasn’t been seen in Germany in decades.

Robin Ewald is a hero in the crisis, even if he isn’t feeling any advantages yet. The 19-year-old is in a training program to become an employee at a supermarket near the German city of Bielefeld. He has been preparing for his final high school graduation exams for weeks now, but he should actually have graduated already. The problem is that those examinations have been postponed until the end of June because of the coronavirus. And that’s at the earliest. Ewald now finds himself waiting, working and attempting to cram his studying in on the side. “On the one hand, we don’t have time to study, and on the other, we don’t even know when our exams will take place.”

Bearing the Brunt of the Dilemma

The first weeks of the pandemic were particularly troubling, he says. As supermarkets were stormed by people panic-buying all the canned goods and toilet paper, his vocational training ground to a halt. “We were supposed to be receiving training, but all we did was sit at the cash registers or stock the shelves,” says Ewald. Drudge work, around the clock. He’s in the third year of his apprenticeship and earns around 1,050 euros a month, plus a coronavirus hazard allowance. Little by way of vocational training is still taking place. He had to teach himself in the evening after his normal job during the day how to place orders.

There is little left of the dual-track vocational training described in his textbook that has made Germany a model around the world. Businesses are supposed to provide practical training and not just exploit young people for cheap labor, even during a crisis. But how is a supermarket supposed to train future staff when it is overrun by shoppers? And how is a hotel supposed to train young people in hospitality when no guests have checked in for months?

Young people are bearing the brunt of this dilemma – with unexpected overtime work at best and dismissal or work furlough at worst. The latter is currently the most common development.

“We know that contracts that have already been signed will now be withdrawn,” says Manuela Conte, the federal youth secretary for the national DGB trade union. Other companies are putting off their applicants, cancelling interviews or simply not answering the phone any more. “At the moment, too few entrepreneurs are thinking about the skilled workers of tomorrow,” says Conte. In April, more than half of all applicants still haven’t been given training contracts – that’s more than 240,000 youth.

Years Rather Than Months

On the surface, those figures don’t provide cause for immediate concern. There were 70,000 more apprenticeship positions than there were applicants in April. But nobody knows how many of these apprenticeships exist only on paper at this point or how many companies are withdrawing previously established training contracts because they have been so hard-hit economically. The situation will get much worse if the economy only recovers slowly from the consequences of the pandemic. Many experts believe it will take years rather than months for that economic recovery to happen.

“I have to completely rethink things.”

Almost one-third of all apprentices receives training in the craft trades in Germany. According to a poll taken by the German Confederation of Skilled Crafts (ZDH) among its members before the loosening of the lockdown rules for the retail trade, one in four businesses planned to reduce its commitment to training. Only 45 percent of the companies said they intended to take on the same number or even more trainees than last year.

“At the moment, we’re heading for a disaster,” says Professor Stefan Sell, a social scientist and labor market expert at the Koblenz University of Applied Sciences. He says Germany is threatened with an enormous shortage of apprenticeship positions – and an uncertain future for part of this generation of high school graduates.

Sell says this could have been largely prevented, because even without the coronavirus, dual-track vocational training had been on shaky ground in recent years. Recently, not even one in five companies was providing apprenticeships for young workers getting their start, programs that provide an attractive alternative in some careers to a university education in Germany. The number has been shrinking for years. Germany’s blue-chip DAX companies are also partly to blame, because they have been increasingly cutting back on cost-intensive capacities. It became cheaper for them to have the young people trained by smaller companies and then to snatch them away. It’s a strategy that is now coming back to haunt the country in the crisis.

A Bailout for Traineeships?

“If we don’t train now, in three years’ time, we will have an even greater shortage of skilled workers than we already have,” says ZDH head Hans Peter Wollseifer. He says nothing is more difficult than winning back a company that has ended its apprenticeship programs. Wollseifer is calling for financial support from the government. Among other things, he says that companies should receive a one-time payment equal to 75 percent of the average training allowance agreed in collective bargaining agreements over a period of three months. “That wouldn’t be much, but it would send out a message that could provide motivation,” Wollseifer says.

Social scientist Sell goes even further, calling for the government to cover the entire salaries for trainees until the end of the year. With just under 550,000 apprentices and an average pay of 600 euros a month, he says this would cost the government around 1.3 billion euros. If you look at the many different assistance programs – all the loans, credit lines and direct aid – he says, “that isn’t all that much money.”

German Economics Minister Peter Altmaier of Chancellor Angela Merkel’s conservative Christian Democratic Union (CDU) party is planning a summit for apprentices at his ministry at the end of May together with Labor Minister Hubertus Heil of the center-left Social Democrats (SPD) and leading representatives of the trade unions and employers’ associations. It’s still an open question whether the government will launch an aid program to assure the survival of the training programs. Officials within the ministry say they will closely monitor the situation in the market for apprenticeships and vocation training. And that if the situation “escalates,” they will react immediately.

But there is at least one point on which the economics minister and labor market expert Sell do agree: The official figures are deceptive. The Federal Employment Agency is currently expecting 8 percent fewer training spots this year. But Altmaier also fears a much stronger slump in apprenticeship positions in the autumn, at least if nothing is done. Altmaier has warned internally that the shortage of skilled workers will still continue to increase. It’s a development that could contribute to a stifling of the post-coronavirus upswing that his own economists are forecasting for 2021 and 2022 at the latest.

The Shards Left Behind

“Young people will not reach their parents’ level of prosperity,” says youth researcher Klaus Hurrelmann. “For them, it’s a matter of hanging on to what they have.” If anything.

And it’s a problem that applies to all social classes, both young workers and young entrepreneurs. “It will be a huge challenge for us as a young generation to clean up the shards left behind by the coronavirus,” says Sarna Röser, 32. In the future, she plans to take over the management of the family business, a manufacturer of concrete projects in the town of Mundelsheim in the southern German state of Baden-Württemberg. She also serves as the chair of the association Die Jungen Unternehmer, a lobby organization for entrepreneurs with family businesses up to the age of 40.

According to Röser, the next two years will see a generation change in 250,000 family owned businesses. “We’re going to have to rebuilt in part from scratch what was built up over generations.”

Even before the crisis, the government had “created any policies for the younger generation, and you can see that again now.” Röser fears that the gigantic mountain of debt will place pressure on the entrepreneurial spirit, which isn’t a good development for a country that is trying to get out of the crisis as quickly and robustly as possible. That’s also not good for young people who are in need of more and not fewer well-paid jobs.

Growing Wage Inequality

Wage inequality between young and old has already been increasing in the past decades. Between 2013 and 2019, average net household assets of 55 to 64-year-olds grew significantly, while those of 25- to 34-year-olds stagnated. Those who are aged between 25 and 35 years and are at the lower end of the income scale earn one-fifth less than low earners of the same age in the mid-1980s, when adjusted for inflation.

Austrian economist Lukas Sustala has used the Lehman crisis to study how young professionals, particularly, suffer from economic slumps and how they are affected permanently. “We can see that the scars from the Great Recession (of 2009) have only been concealed rather than healed,” he says. After 2009, young people, in particular, “muddled through” a shaky labor market where employers gave them temporary contract after temporary contract and didn’t grant them permanent employee protections. Sustala believes the lid has been ripped off these inconsistencies. “Those who can be laid off most easily are laid off,” he says.

Those who do manage to find a job are usually stuck having to accept a lower salary. This is a handicap that takes years to overcome, because after the crisis, “the next generation of entry-level employees is already available as competition, one that doesn’t bear the stigma of long-term unemployment or underqualified work,” says Hilmar Schneider, CEO of the Institute of Labor Economics (IZA).

Economics researcher Sustala, who is himself only 33 years old, is very concerned about his successor generation. Even before the coronavirus crisis, younger people found it harder to build up assets due to rising housing costs and lower income growth. This has had knock-on effects on young workers that go beyond their careers. Important milestones in life, like establishing a family, building a home or becoming a property owner are made at 30, not at 60. “If you don’t feel secure, then you make different choices,” says Sustala.

The lack of instruction in schools and universities is also leaving economic wounds. “On average, every year of education increases the income on the labor market by 10 percent,” says Ludger Wössmann. The head of the Center for Economics of Education at Munich’s Ifo Institute researches the links between education and economic success. School closures, as shown by various studies on teacher strikes abroad, lead to a lack of competence building and has “clearly negative financial consequences in the long term,” Wössmann says.

Research into the summer holidays has shown that the gap between pupils from poorer backgrounds and those from economically stronger households is very wide. “Nothing is lost with those who sit and read books,” Wössmann says. “But with others, the losses are striking.” And surveys show “that a large share of pupils in Germany aren’t doing very much for school right now.”

Der Spiegel

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