Households failed to absorb massive job loss during economic crisis

Vulnerable households bore the brunt of the job loss caused by the Great Recession and are ill-prepared to weather the gathering economic storm.

The Great Recession, propelled by the 2008 financial-market crash, led to an upsurge in mass unemployment in Europe. This economic shock had negative yet divergent impacts on households. Many single-earner and some multiple-earner households became completely jobless. Households with no member in gainful employment are very likely to experience poverty, with children in such families particularly suffering deprivation.

In many crisis countries, youth unemployment increased significantly. A common expectation was that this could be absorbed by families. Many households in Europe, particularly those with only one main breadwinner before the crisis, were however unable to absorb the extraordinary unemployment shock.

Coping strategies in the face of such shocks differ considerably across Europe. Lessons learned from this recent crisis can inform our understanding of the possible consequences of the current global downturn.

The crisis hit Europe at a time when the European Union had set an ambitious employment target for 2020—to raise not only individual employment but also reduce the number of low work-intensity households. The crash and subsequent euro-debt crisis made these aims unachievable. Instead, widespread job loss affected nearly all countries, with very few exceptions, notably Germany and Poland.

Limited welfare support

Rising individual unemployment does not however necessarily mean more jobless households. Unemployment might mostly affect dual-earner households who can deal with the loss of one earner. People in a partnership living apart might decide to merge their households to live off one income and save housing costs. Adult children might move back in with their parents after becoming unemployed. Such absorption of unemployment risks by households has been a key coping strategy in countries with limited welfare support or where traditional family forms remain dominant.

We tested whether and to what extent households across 30 European countries absorbed the unemployment shock during the Great Recession. We used the EU Statistics of Income and Living Conditions (EU-SILC) dataset to analyse household non-employment from 2007 to 2014.

Many individuals lost their jobs and at the peak of the crisis in many countries household non-employment increased to record levels (see map). Particularly, Ireland, southern- and several eastern-European countries saw large increases in jobless households. (Denmark and Finland had many already—largely single-adult households.)

Using shift-share analysis, we decomposed the change in household non-employment to its components. The dominant share in changes of household non-employment could be accounted for by the overall individual job-loss rate across European economies following the recession. But we also found that a non-trivial fraction of the growth in jobless households had been due to changing household composition and as the result of an unequal distribution of job losses across households.

Instead of absorption of non-employment risks, we observed their accumulation in vulnerable households. In most countries, average household size became smaller during the crisis—instead of coming together to pool resources and thus reduce their risk, some households split up. Dual-earner households were meanwhile less affected.

That the most vulnerable households were hit more frequently by non-employment meant a growing polarisation between households with employment and those without. Alarmingly, this pattern was evident in those economies hit hardest by the crisis: in Ireland, across southern Europe and in several eastern-European countries.

Symptomatic examples are Greece, Ireland and Estonia. The figure shows that overall household non-employment rose dramatically after 2008—more quickly in Estonia and Ireland, followed by Greece from 2011. This was in large part due to mass unemployment affecting the overall individual risk of non-employment (see blue bars). Changes in household size (red bars) and the unequal distribution of non-employment across households—the polarisation element (yellow bars)—accounted for the remainder.

Decomposing the increase in household non-employment rate (%) in three crisis countries 2009-14, compared with 2008

These household-related factors account for a larger jobless share in Ireland and belatedly in Estonia, least so in Greece. If households had at least partly absorbed individual job loss, the bars for household size and polarisation should have been negative, thus counterbalancing the unemployment shock. This only happened to a trivial degree in Estonia during the first three years.

The figure also shows that household non-employment partly decreased in Ireland and Estonia when the economy recovered, whereas Greece had not yet reached its bottom by 2014. Despite the improvements in Ireland and Estonia, jobless households only decreased in line with individual non-employment, while joblessness due to changing household size and unequal distribution of non-employment persisted.

Our findings are in line with previous research which has documented increasing inequality between households throughout advanced economies. Indeed, the Great Recession has accelerated this trend.

Outdated model

The southern- and eastern-European crisis countries as well as Ireland offer fairly limited welfare support for jobless households; they also have presumed family support based on a (by convention male) breadwinner model. Yet neither were breadwinners effectively protected from job loss during the crisis, nor were households growing in size to absorb jobless partners or (adult) children—despite the lack of sufficient welfare support. Thus, the implicit reliance on absorption seems outdated.

Instead, the Great Recession has clearly shown that the unemployment shock during such a crisis is too much for such coping strategies by families or partnerships. It is questionable if absorption of individual risks in households can be desirable, as it strains these households even further.

Instead of relying on an outdated family ‘subsidiarity’ model, far-reaching welfare-state intervention is needed to prevent the most vulnerable households from becoming fully jobless. Obviously, during such a crisis employment shocks call for greater solidarity and a better safety net, which avoids low work intensity and helps households to maintain employability.

Reliance on one breadwinner no longer seems a viable strategy to protect households as they seek resilience against job loss during a crisis. Efforts to spread employment across households more widely over the last decade have been insufficient to allow all of Europe to weather the unemployment shock now in train.