Tackling unemployment in recession: The effects of short-time work policy (with Brigitte Hochmuth, University of Erlangen-Nuremberg)

Britta Gehrke | University of Nuremberg 

Short-time work subsidizes working time reductions of firms in order to stabilize employment. Many OECD countries have used this policy, for example, in the Great Recession. Using regime-switching vector-autoregressions, we find large differences in the effects of discretionary short-time work depending on the state of the economy. First, we identify short-time work shocks in German time series data. Second, we show that expansionary short-time work reduces unemployment in recessions but tends to rise unemployment in expansions. In recessions, discretionary short-time work is a targeted policy that helps firms to overcome temporary difficulties, whereas in expansions it subsidizes firms that suffer from structural problems.