key topic

How should governments manage recessions?

Recessions, like the Great Recession that affected labor markets around the globe during the late 2000s and those that countries are now experiencing as a result of the Covid-19 pandemic, have a detrimental effect on jobs and people. The negative impacts can see increased unemployment (particularly among youth), changes in job status (from full-time to part-time or contract work), or a decrease in work hours (short-time work) or wages. They may also lead to persistent reductions in an entire generation’s future earnings, while the job insecurity experienced by workers may impair their physical and mental health. Given that the current pandemic doesn’t look like abating in the near future, what should governments be doing to help their labor markets and workers during such a prolonged period of economic uncertainty?

  • Short-time work compensation schemes and employment Updated

    Temporary government schemes can have a positive economic effect

    Pierre Cahuc, May 2019
    Government schemes that compensate workers for the loss of income while they are on short hours (known as short-time work compensation schemes) make it easier for employers to temporarily reduce hours worked so that labor is better matched to output requirements. Because the employers do not lay off these staff, the schemes help to maintain permanent employment levels during recessions. However, they can create inefficiency in the labor market, and might limit labor market access for freelancers and those looking to work part-time.
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  • Why does part-time employment increase in recessions?

    Jobs can change quickly from full- to part-time status, especially during economic downturns

    Daniel Borowczyk-Martins, October 2017
    The share of workers employed part-time increases substantially in economic downturns. How should this phenomenon be interpreted? One hypothesis is that part-time jobs are more prevalent in sectors that are less sensitive to the business cycle, so that recessionary changes in the sectoral composition of employment explain the increase in part-time employment. The evidence shows, however, that this hypothesis only accounts for a small part of the story. Instead, the growth of part-time work operates mainly through reductions in working hours in existing jobs.
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  • Hours vs employment in response to demand shocks

    Evaluating the labor market effects of temporary aggregate demand shocks requires analyzing both employment and hours of work

    Robert A. Hart, October 2017
    Labor market responses to temporary aggregate demand shocks are commonly analyzed and discussed in terms of changes in employment and unemployment. However, it can be seriously misleading to ignore the interrelated behavior of hours worked. Work hours can be altered relatively speedily and flexibly, and this strongly relates to employment, labor productivity, and unemployment outcomes. The hours–employment distinction is especially important in the evaluation of the performances of European labor markets during the negative shock experienced during the Great Recession.
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  • Unemployment and the role of supranational policies

    EU supranational policies should be more active at promoting institutional reforms that reduce unemployment

    Juan F. Jimeno, October 2017
    Unemployment in Europe is excessively high on average, and is divergent across countries and population groups within countries. On the one hand, over the past decades, national governments have implemented incomplete institutional reforms to amend dysfunctional labor markets. On the other hand, EU supranational policies—those that transcend national boundaries and governments—have offered only limited financial support for active labor market policies, instead of promoting structural reforms aimed at improving the functioning of European labor markets. Better coordination and a wider scope of EU supranational policies is needed to fight unemployment more effectively.
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  • Firm size and business cycles

    Do small businesses shed proportionately more jobs than large businesses during recessions?

    Tulio A. Cravo, June 2017
    The discussion on how economic activity affects employment in large and small businesses is critical for the formulation of labor policies, especially during recessions. Knowing how firm size is related to job creation and job destruction is important to design effective policies aimed at dampening employment fluctuations. Recent evidence for developed countries indicates that large firms are proportionately more sensitive to cycles than small firms; however, this pattern is not confirmed for periods of credit constraint or in a developing country context, where small businesses might be more sensitive due to more extreme credit constraints.
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  • Do firms’ wage-setting powers increase during recessions?

    Monopsony models question the classic view of wage-setting and reveal a new reason why wages may decrease during recessions

    Todd Sorensen, April 2017
    Traditional models of the labor market typically assume that wages are set by the market, not the firm. However, over the last 15 years, a growing body of empirical research has provided evidence against this assumption. Recent studies suggest that a monopsonistic model, where individual firms and not the market set wages, may be more appropriate. This model attributes more wage-setting power to firms, particularly during economic downturns, which helps explain why wages decrease during recessions. This holds important implications for policymakers attempting to combat lost worker income during economic downturns.
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