Why and When to Help Firms Keep Workers in a Crisis

With short-time work programs, governments allow firms experiencing temporary demand or productivity shocks to reduce hours worked, while providing income support to their employees for the hours not worked. A new study finds that such policies can improve employment outcomes for workers during periods of crisis. By participating in these programs, firms are able to retain more workers and are more likely to survive. In the event of prolonged economic shocks, however, short-time work programs may impair efficient labor market allocation.

During periods of difficulty, due to productivity shocks or widespread economic crises, firms might be forced to lay off part of their workforce as a cost-cutting solution. Through short-time work (STW) programs, governments act to prevent mass layoffs by subsidizing companies to retain their employees while reducing individual working hours. Such measures were especially popular during the COVID pandemic, when a third of the European labor force was under a short-time work scheme.

To understand the effects of STW on firm and employee outcomes, in a forthcoming paper, Professors Giulia Giupponi (Bocconi University) and Camille Landais (London School of Economics) study the impact of such programs in Italy during the Great Recession. Using detailed administrative data on companies and individual workers, they exploit variation in eligibility across Italian firms for a STW program, the Cassa Integrazione Guadagni Straordinaria, to shed light on the employment, productivity, and welfare effects of the policy.

Even though during the Recession employment levels decreased across the board, companies that used STW ended up having on average a 45% higher level of employment than the rest. The effect derives from their ability to retain a greater number of workers by reducing individual hours worked and thus their overall wage bill cost. Government subsidies ensure that workers' overall compensation decreases by substantially less than what would be implied by the reduction in hours.

The researchers find that the take-up of STW was particularly high among firms with low liquidity or a high risk of large reductions in their labor force. Since the fundamental premise of STW programs is to aid firms unable to efficiently hoard labor during crises, these findings indicate that the program was successful in reaching its primary targets. Overall, the policy is estimated to have increased the probability of survival of firms by 10%.

"The key result of the paper is that short time work works. It helps saving employment in firms that use the program and offers a substantial degree of short-term insurance to workers against the cost of hour reductions and job loss," stated Prof. Giupponi.

The paper also investigates the dynamic effects of STW after the program ends. "Once the subsidy ends, the positive effects on employment at the firm level dissipate, as does the insurance value that the program offers to workers," said the author. In the medium and long run, workers who participated in STW programs fared only marginally better in terms of employment outcomes than those laid-off before the crisis.

"There is a risk that – when the shock is permanent – short-time work might end up subsidizing low-productivity jobs," added Prof. Giupponi. Specifically, the researchers find that – in the Italian context during the Great Recession – low-productivity firms had a high propensity to use the policy, even though they had limited prospects of growth once the program ended. One may worry that, by subsidizing work in low-productivity firms, short-time work may prevent workers from moving to high-productivity companies, with negative consequences for aggregate productivity.

To shed light on the overall impact of the policy on the economy, the researchers exploit exogenous variation in the intensity of short-time work utilization across Italian local labor markets to understand whether a more intense use of the program translated into poorer economic outcomes. Results suggest that areas with higher STW utilization experienced slower employment growth and total factor productivity growth, even though these effects are of modest size.

The authors provide compelling evidence that STW programs were effective in preventing a surge in unemployment during the Great Recession and can be an important tool to mitigate the impact of economic crises. However, the program is best employed in the face of temporary rather than permanent shocks: when shocks become persistent, short-time work can hinder the reallocation of workers to other firms and limit economic growth.

To guarantee that the program's benefits are maximized, the authors propose to introduce mechanisms – such as a co-payment by firms – to attract into the program those who are willing to bear part of the cost. "This is one way by which we can improve the selection of firms and reduce the likelihood of these potential reallocation effects," Prof. Giupponi concluded.

Giulia Giupponi, Camille Landais, "Subsidizing Labor Hoarding in Recessions: The Employment & Welfare Effects of Short Time Work." Forthcoming in The Review of Economic Studies.