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In 2020, the COVID-19 pandemic caused by far the largest shock to European economies since World War II. Yet astonishingly, the EU unemployment rate had already declined to a record low by December 2021, and in some countries the labor force participation rate is at a record high. This departmental paper documents that the widespread use of job retention schemes (JRSs) has played an essential role in mitigating the pandemic’s impact on labor markets and thereby facilitating the restart of European economies after the initial lockdowns. Nonetheless, it also highlights the daunting labor market challenges in the post-pandemic era, many of which are legacies from pre-pandemic days, including major structural changes that the pandemic has simply accentuated. Unless these are addressed, major job losses relative to a pre-pandemic baseline may well materialize. That said, European labor markets will likely exit the pandemic in much better shape than following previous recessions, providing policymakers a potentially crucial head start in navigating the structural transformations that lie ahead and in making sure nobody gets left behind. This opportunity should not be wasted.

A rapid and forceful policy response at both EU and national levels prevented labor market outcomes being much worse than initially feared. Indeed, the analysis in this paper suggests that the unemployment response to the historic pandemic-induced fall in activity was much more muted than previous economic cycles would have suggested. In addition to other policy support, this largely reflects the widespread use of JRSs that is estimated to have mitigated the rise …