Is short-time work a good method to keep unemployment down?

Pierre Cahuc, Stéphane Carcillo

One method for combating unemployment during the global crisis has been the use of short-time work schemes that allow employers to temporarily reduce hours worked while compensating workers for the induced loss of income. In the first of two columns on labour markets, the authors present new evidence establishing that these schemes do indeed reduce unemployment. But they are no panacea and are not without their own problems.

Short-time compensation (or short-time work) aims at reducing lay-offs by allowing employers to temporarily reduce hours worked while compensating workers for the induced loss of income. At present, short-time work schemes are widespread among OECD countries, having grown in popularity during the Great Recession. As shown by Figure 1, they are now used in 25 of the 33 OECD countries.1

Figure 1. Short-time work take-up rates in the OECD countries (as a percentage of employees)

Source: OECD (2010), Hijzen and Venn (2010), data completed by the authors.

And these short-time work schemes appear to have been successful. European countries with widespread and generous short-time compensation experienced a smaller rise in unemployment in the recent recession than those without. The leading example is Germany that makes a particularly intensive use of a short-time work programme (the Kurzarbeit).

This success has renewed interest in short-time work. But the idea itself is nothing new. The suggestion that it could be more efficient and more equitable to share jobs with short-time compensation rather than destroying jobs during has been repeatedly put forward by advocates of work-sharing. For instance, Abraham and Houseman (1994) argued that short-time work arrangements can be more equitable since they spread the costs of adjustment more evenly across members of the work force instead of concentrating it on a small number of laid-off workers.

But short-time compensation programmes are no panacea. They can induce inefficient reductions in working hours. Moreover, workers in permanent jobs have incentives to support such schemes in recessions in order to protect their jobs. Employers also have incentives to support short-time compensation programmes in countries where stringent job protection induces high firing costs. Therefore, there is a risk attached with using these programmes too intensively. The benefits of insiders can be at the expense of the outsiders whose entry into employment is made even more difficult.

It is not obvious that short-time work reduces unemployment: Presenting new evidence

Actually, current understanding of the employment effects is very limited. Empirical studies relying on firm-level data compare employment of firms that use short-time work with employment of those which do use short-time work. These studies suffer from selection biases because participating firms are less competitive than other firms, and the participating firms tend to have relative bad employment performance. Other studies rely on cross-country data. Yet the raw correlation between unemployment and short-time take-up rate – which is usually positive or small – cannot be interpreted as a causal impact of short-time schemes. A major reason for this is that the rules of short-time work schemes imply that take-up rates will rise when unemployment increases. Indeed, this phenomenon has been reinforced in the recent recession, when governments and social partners improved access to short-time work schemes in order to limit job destructions.

In recent research (Cahuc and Carcillo 2011), we evaluate the consequences of short-time work programmes on labour market performances in the 2008-2009 recession using quarterly data for the OECD countries. We get rid of the potential bias induced by the fact that short-time take-up rates are spontaneously influenced by changes in unemployment and by the reactions of governments and social partners. More precisely, we explain variations in short-time take-up by factors that could not be influenced by the increase in the unemployment rate during the recession.

These factors are the recourse to short-time work before the recession, as well as some features of short-time work schemes before the recession, such as the percentage of reduction in weekly working hours that can be compensated. This choice is made for two reasons.

First, it is likely that take-up rates have been stronger during the recession in countries where short-time work programmes existed or were more generous before the recession, because it takes time to adapt the regulations and to implement short-time work programmes.

Second, it is likely that the features of short-time work arrangements before the entry into the recession are not correlated with other unobserved variables that are related to changes in unemployment during the recession.

Using this approach, it turns out that short-time work compensation programmes indeed stabilised employment and reduced unemployment during the recent recession. A one point of percentage increase in short-time take-up rates is associated with a decrease of one point of percentage in unemployment and an increase of one point of percentage in employment. However, short-time work has a positive impact on permanent employment, but not on temporary employment. This suggests that short-time work is mainly beneficial to permanent workers (see also Hijzen and Venn 2010).

All in all, it seems that short-time work programmes used in the recent downturn had significant beneficial effects.

However, Special attention should be devoted to the design of these programmes.

Empirical evidence indicates that short-time work programmes had beneficial effects in the downturn.

Their impact in the recovery period is not documented yet.

Short-time work programmes can induce inefficient reductions in working hours. They can also inefficiently lower the reallocation of jobs toward more productive jobs.

In order to limit these negative effects, which may become costly in the long run, two features should be built into their design.

First, it is worth introducing experience-rating, which implies that social contributions paid by employers to finance unemployment insurance depend on the costs induced by their participation in short-time work programmes.

Longer participation in the programme should yield higher contribution rates.

Second, it is important to commit to stable rules, which may be designed under normal economic conditions – and not during recessions – in order to avoid that in turbulent periods pressure groups require excessively generous schemes, which can be difficult to turn off later on.

Indeed, persistently high take-up rates can be costly for the society as a whole and detrimental to some categories of workers non-eligible to short-time compensation programmes.

As a final warning, it should be stressed that much remains unknown about the impact of short-time work. While macroeconomic evaluations have the advantage to identify a net global impact, their conclusions are drawn from a relatively small set of observations, which limits the ability to finely identify the impact of programmes. Larger sets of observations collected at the firm-level are needed to confirm these conclusions.

References

Abraham, K and S Houseman (1994), "Does Employment Protection Inhibit Labour Market Flexibility? Lessons from Germany, France, and Belgium", in R Blank (ed.), Social Protection versus Economic Flexibility: Is There a Trade-Off?, University of Chicago Press, Chicago.

Cahuc, P and S Carcillo (2011), “Is short-time work a good method to keep unemployment down?”, CEPR Discussion Paper 8214.

Hijzen, A and D Venn (2010), “The role of short-time work schemes during the 2008-09 recession”, OECD Working Paper 115.

The OECD average take-up rate was less than 0.2% in the fourth quarter of 2007, just before the recession, and ballooned to 1.3 % in the fourth quarter of 2009