In several European countries, governments are looking to short-term compensation schemes as a way of mitigating the potential economic impacts of the COVID-19 pandemic. But do these schemes work in the longer term?
According to the evidence, in Germany, Japan, and Italy, more than 4% of the labor force were on a short-time work compensation scheme in 2009, in the trough of the recession.
Government schemes that compensate workers for the loss of income while they are on short hours make it easier for employers to temporarily reduce hours worked so that labor is better matched to output requirements.
When such schemes are offered, there is a strong take-up. But do the schemes have a positive economic effect? Do they help to reduce unemployment levels? Or do the distortions they cause in the labor market have a negative effect that outweighs their advantages?
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.
Germany, Japan, and Italy are examples of countries that have been affected by a strong decline in output while unemployment has increased only moderately, if at all. They have also used short-time work compensation schemes during the Great Recession of 2008–2009.
This suggests that these schemes might have a positive effect, and these apparent successes have led to a renewal of interest in them. But to discover whether the apparent success is real, it is necessary to look at earlier research into the consequences of introducing this type of scheme.