The heterogeneous impact of short-time work: From saved jobs to windfall effects

Pierre Cahuc, Francis Kramarz, Sandra Nevoux 26 May 2021

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Whereas unemployment insurance is, and has long been, an essential component of the employment policies toolbox, short-time work is a relative newcomer.  However, the Covid-19 crisis transformed short-time work into the first choice of policymakers, at least on the European side of the Atlantic. 

But this newfound enthusiasm should not obscure the relative lack of solid academic evaluations of the consequences of short-time work now available to policymakers (Giupponi and Landais 2018, 2020, Kopp and Siegenthaler 2021, Cahuc et al. 2018). This deficit will be all the more troublesome as countries are compelled to decide how and when to make their firms transition out of short-time work in the aftermath of the Covid-19 crisis, a period when windfall effects could be significant. 

French public decision-makers appear to be fully aware of these problems. After a period of increasing expenditures at the start of the Covid-19 crisis, they tried to restrict the extent of the scheme to firms “really needing short-time work”. Indeed, at the end of May 2020, the short-time work take-up rate culminated at 33% in France, one of the highest levels among OECD countries. This was achieved through increasing the scheme’s generosity, extending eligibility, and facilitating application procedures. After May 2020, French public decision makers progressively limited access to short-time work by reducing its generosity, restricting its eligibility, and controlling its use. However, under pressure from employers’ organisations and trade unions, improved access to short-time work was granted under “specific” conditions in July 2020. 

At the time of writing, as well as in the very near future, the lack of clear guidelines emerging from both theory and empirical evaluations is hampering – and will continue to hamper – attempts by the authorities to limit take-up to those “really” in dire need of the short-time work programme. This problem is clearly not limited to France. Many countries throughout the world have expanded short-time work programmes in response to the two severe crises that have occurred since 2008. While the OECD average take-up rate was less than 0.2% in the fourth quarter of 2007 – just before the 2008-2009 Great Recession – it increased six-fold, to 1.3% in the fourth quarter of 2009. More strikingly, in response to the Covid-19 crisis, OECD countries further increased their use of short-time work by a factor of 15 with respect to its 2008-2009 Great Recession levels, to reach 21% at the end of May 2020 (OECD 2020).

In a new paper (Cahuc et al. 2021), we provide theoretical and empirical analyses of the windfall effects associated with short-time work. We demonstrate that short-time work may have very heterogeneous effects on employment and hours of work depending on the firm using it. We show that short-time work is targeted at low-productivity jobs, and that it has the potential to save them and even to increase the number of hours of work when firms face a sharp but temporary drop in revenues. Our analysis of the take-up decision also allows us to isolate a source of windfall effects: firms facing a limited decrease in revenues are likely to use short-time work for a fraction of their employees, and hence, to reduce hours for jobs at no risk of being destroyed. In such firms, short-time work reduces the number of hours of work without saving jobs.

On the empirical side, we focus on the 2008-2009 Great Recession. We provide evidence that the heterogeneity of the département-level  approval rate of short-time work applications plays a key role in its take-up. This allows us to compare the situation of firms hit by similar demand shocks but with different access to short-time work due to differences in the local short-time work approval rate. 

Figure 1 shows that short-time work saves jobs in firms hit by large negative shocks but has no significant impact on employment for other firms. Furthermore, short-time work increases the total number of hours of work in firms hit by large negative shocks. By contrast, the impact declines and becomes negative when the shocks become less important. 

Figure 1 Estimates of the impact of short-time work take-up in 2009 on employment and hours of work by quintile of predicted growth rate of hours of work in 2009 

Note: This figure reports the estimates and the 95% interval confidence of the impact of short-time work take-up in 2009 on the employment growth rate (top panel) and the growth rate of hours of work (bottom panel) of firms by quintile of predicted growth rate of hours of work in 2009 (from the lowest quintile Q1 to the highest quintile Q5) and for all firms (All). The I-bars report the 95% confidence interval. 

We find that enrolling one additional worker in the short-time work scheme is shown to save 0.6 jobs in 2009 at the bottom quintile of the predicted growth of hours of work distribution –hence for firms hit by the largest (most negative) expected shock. The large employment effects at the bottom quintile imply that hours of work increase. By contrast, there is no detectable short-term effect on employment at all other quintiles, even though the number of hours of work is reduced, especially at the top (most positive) quintile. An additional short-time work subsidy of one percentage point of the firm’s previous-year payroll translates into a 20% increase in a firm’s employment and a 16% increase in a firm’s hours of work at the bottom quintile. At all other quintiles, there is no short-term employment effect, whereas hours of work are reduced. 

Mid-term effects (2008-2011) are consistent with these short-term effects. Short-time work users at the first quintile grew faster between 2008 and 2011, suggesting that short-time work helped them recover, albeit with no effect of the policy on a firm’s survival. Firms at all other quintiles are not affected by the policy in this mid-term horizon. 

All results point to the same conclusion: short-time work was very effective at saving jobs for firms hit by large negative shocks. To assess this effectiveness, we compute the cost per job saved by short-time work: €2,700 in 2009, or 7% of the average annual labour costs, both measured for firms at the bottom quintile of the expected shock distribution. However, since short-time work does not create jobs at all other quintiles, the costs per job saved are higher. Accounting for short-time work subsidies paid in 2009 to firms at all quintiles, the cost per job saved becomes 45% of the average annual labour costs per job. Hence, windfall effects induced by the short-time work policy are quite large. Still, the short-time work policy is less costly than wage subsidies because the former allows firms to target both those employees at risk of losing their job and their non-worked hours, something impossible for the latter.

All in all, our analysis suggests that short-time work had desirable properties when the Great Recession hit. But the size of windfall effects evaluated in our paper indicates that its effectiveness significantly hinges on its design. From this perspective, our results suggest ways to optimise short-time work schemes.

First, the scheme should be targeted at firms facing large drops in revenue. A way to screen firms might be to subsidise short-time work for a sufficiently large number of non-worked hours per employee rather than subsidising non-worked hours below the usual contractual number of hours worked from the outset, as was the case in France during the Great Recession, since employees whose hours worked are reduced by small amounts are less at risk of seeing their jobs destroyed.

Second, introducing experience ratings should reduce the windfall effects, as stressed by Burdett (1989). When financial markets are imperfect, short-time work may be useful to firms in temporary distress. However, if firms can use short-time work at no cost, some firms may decide to make the policy their usual tool when faced with certain repetitive shocks, rather than search for other ways to overcome such temporary but recurring difficulties (Cahuc and Nevoux 2017).

Finally, as stressed by Cooper et al. (2017), extending the short-time work policy is likely to decrease allocative efficiency on the labour market, resulting in significant output losses. This suggests that short-time work schemes should only be implemented cautiously outside recessions.

References

Burdett, K and R Wright (1989), “Unemployment insurance and short-time compensation: The effects on layoffs, hours per worker, and wages”, Journal of Political Economy 97(6): 1479–1496. 

Cahuc, P, F Kramarz and S Nevoux (2018), “When short-time work works”, CEPR Discussion Paper 13041.

Cahuc, P, F Kramarz and S Nevoux (2021), “The heterogeneous impact of short-time work: from saved jobs to windfall effects”, CEPR Discussion Paper 16168. 

Cahuc, P and S Nevoux (2017), “Inefficient short-time work”, CEPR Discussion Paper 12269. 

Cooper, R, M Meyer and I Schott (2017), “The employment and output effects of short-time work in Germany”, NBER Working Paper 23688.

Cooper, R, M Meyer and I Schott (2017), “The employment and output effects of short-time work in Germany”, VoxEU.org, 28 October. 

Giupponi, G and C Landais (2018), “Subsidizing labor hoarding in recessions: The employment and welfare effects of short time work”, CEPR Discussion Paper 13310.

Giupponi, G and C Landais (2020), “Building effective short-time work schemes for the COVID-19 crisis”, VoxEU.org, 1 April. 

Kopp, D and M Siegenthaler (2021), “Short-time work and unemployment in and after the Great Recession”, Journal of the European Economic Association, forthcoming. 

OECD (2020), “OECD employment outlook 2020: Worker security and the covid-19 crisis”, Techical report.

Endnotes

1 Short-time work, also called short-time compensation, is a public program that tries to preserve jobs at firms or establishments experiencing low revenues temporarily. It provides wage subsidies to the employees the firm wishes to keep in-house, albeit with reduced work hours.

2 Metropolitan France has 95 départements, which are decentralised administrative units in charge of the administration of the short-time work sch

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Topics:  Labour markets

Tags:  short-time work, France, working hours, jobs

Professor of Economics, Sciences Po

Director, Centre de Recherché en Economie et Statistique (CREST); Professor, ENSAE; Associate Professor, Ecole Polytechnique

Research Economist, Banque de France

CEPR Policy Research