Reamonn Lydon, Thomas Mathae and Stephen Millard

Short-time work (STW) schemes are an important fiscal stabiliser in many countries. In the Great Recession, 25 out of 33 OECD countries used short-time work schemes (Balleer et al. 2016). STW schemes aim to preserve employment in firms temporarily experiencing weak demand. This is achieved by providing subsidies to firms to reduce number of hours worked by each employee, instead of reducing the number of workers. As well as being paid for actual hours worked, the subsidy is used to pay workers for hours not worked – albeit not completely compensating the loss of income due to reduced hours. In most countries, the bulk of the subsidy is paid by the state, although companies can also contribute.

STW is appealing from a risk-sharing perspective as it spreads negative shocks across more workers. It can also be more efficient than the alternative, especially if hiring and firing costs are high. In some countries, such as the UK, there is no official scheme. In other countries, official schemes are a core part of the institutional labour market infrastructure. Furthermore, as Cahuc and Nevoux (2017) point out, initially temporary expansions of some schemes during the recession have become a permanent part of the landscape in countries such as France.

In a recent Staff Working Paper, we use data from the third wave of the ECB Wage Dynamics Network Survey (WDN3, 2014/15) to see what determines take-up of STW schemes and what are the wider economic effects. The survey asks firms how they adjusted their labour inputs – both in quantity (employees and hours) and in wages – in response to various shocks between 2010 and 2013. The sample of just under 25,000 firms across 20 EU countries, including the UK, represents a population of 5.5 million firms and 95 million workers.

Between 2010 and 13, short-time work was used by 7% of European firms, employing 9% of workers (Figure 1). Workers in these firms, while facing a subsidised reduction in their hours, were far less likely to lose their jobs during the Great Recession, as Figure 2 illustrates for manufacturing firms.

Who uses STW and why?

If STW plays such an important role in how firms react to shocks and how workers are affected, we want to understand what determines take-up. First off, it is important to control for the shocks firms experienced. Two types of shocks appear to matter: negative demand shocks and shocks affecting firms’ ability to access finance for their business activities make them much more likely to use STW. Our interpretation is that reduced access to finance makes it more difficult for a firm to weather cyclical downturns, prompting them to reduce labour costs through short-time work, or other means.

Figure 1 STW take-up in Europe 2010-13

Source: WDN3.

Notes: Private sector firms in Manufacturing, Construction, Trade, Business and Other Services and Financial Intermediation.

Figure 2 Demand shocks, employment adjustment and STW take-up

Source: WDN3.

Notes: Private sector firms in Manufacturing.

STW schemes are a flexible way for firms to retain workers when demand is temporarily weak. As more productive workers are more valuable to firms, regardless of the level of demand, there is a greater incentive to use short-time working schemes for these workers. Worker-productivity is not recorded directly in WDN3 survey, but the share of high- and low-skill workers and short- and long-tenure workers is. Assuming these measures are positively correlated with productivity, we expect take-up to be greater in firms with higher shares of these types of workers, which is what we find (Figure 3). In fact, for firms with a very high proportion of long-tenure workers (90%+) STW take-up is more than double that of firms with low average job-tenure levels.

Figure 3 STW take-up in high-skill (Panel A) and long-tenure (Panel B) firms

Source: WDN3.

Notes: All sectors. Data are predicted values from a regression controlling for firm and worker characteristics, altering the values for skill composition and tenure. ‘High-skilled’ in the chart refers to high-skilled non-manual workers.

Institutional factors are also important for STW take-up. Scheme characteristics, such as how easy it is for workers and firms to avail of them, affects take-up. Equally important is how STW interacts with other labour market institutions. For instance, STW take-up is higher in countries with more stringent employment protection legislation.

Another institutional factor, if we can call it that, is downward nominal wage rigidity, that is, the inability of firms to reduce wages, due, for example, to the effects on morale and/or effort of doing so. Theory suggests that firms that have to reduce labour costs are more likely to use STW if wages are more rigid. To explore this, we construct a continuous measure of downward wage rigidity at the country-sector level along the lines of Dickens et al. (2007), where zero reflects fully downward flexible wages, and 100 completely rigid. We find that downward wage rigidity does matter for STW take-up. In sectors with low- to medium-levels of downward wage rigidity, take-up is relatively low (5%). In contrast, STW take-up jumps to 10%, and then 14%, in firms with ‘high’ and ‘very high’ levels of wage rigidity, respectively.

Figure 4 Downward wage rigidity and STW

Source: WDN3.

Notes: Conditional on firms saying they had to reduce labour inputs between 2010 and 2013. Data are predicted values from a regression controlling for firm and worker characteristics, altering the values for wage rigidity.

Does STW take-up matter in aggregate?

For the individual worker or firm, STW clearly shelters them from the worst effects of recessions. However, does it have a significant aggregate impact? This question is the focus of several papers on the job-saving effects of STW in individual countries (eg, Balleer et al. 2016 for Germany). To answer this question with the WDN3 data, we divide countries and sectors into those with high levels of STW take-up, where more than 10% of firms use STW in the country-sector, and those with low-levels, where fewer than 1% of firms use STW. Using Eurostat data on employment and output per sector from 2008-13, we then estimate the response of employment to falls in output for high- and low-STW sectors.

Figure 5 shows the results in the form of the responses of employment to a 1% fall in output. The fall in employment is considerably lower for high-STW sectors, where it peaks at 0.12% after three to four quarters. In low-STW sectors, by contrast, the employment fall peaks at the much higher level of almost 0.40%, after just two quarters. This suggests that STW can have significant aggregate effects, smoothing changes in overall employment through the cycle.

Figure 5 Effect of STW on the response of employment to a fall in output

Source: WDN3.

Notes: Responses estimated from a panel VAR, assuming that employment follows output with a lag. There are 2,222 country-sectors in the two samples, of which, approximately 900 are in the high-STW group.

Conclusion

Our work documents the influences on the take up of short-time work schemes in many EU countries. Economic theory as to why firms might use these schemes is completely backed-up by the data: negative shocks, higher firm-specific human capital, labour market institutions that increase firing costs, and greater levels of wage rigidity all push firms towards availing of these schemes. We also provide some evidence that the presence of STW schemes can reduce the fall in employment brought on by a recession.

A similar version of this post was published by VoxEU.

Reamonn Lydon works for the Central Bank of Ireland,

Thomas Mathae for Banque centrale du Luxembourg and

Stephen Millard works in the Bank’s Structural Economics Division.

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