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Short-time work benefits: What have we learned from the Great Recession?* Herbert Brücker IAB and University of Bamberg SZW Conference Industrial Relations.

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Presentation on theme: "Short-time work benefits: What have we learned from the Great Recession?* Herbert Brücker IAB and University of Bamberg SZW Conference Industrial Relations."— Presentation transcript:

1 Short-time work benefits: What have we learned from the Great Recession?* Herbert Brücker IAB and University of Bamberg SZW Conference Industrial Relations in Transition The Hague, March 25, 2013 *This presentation is based on Tito Boeri and Herbert Brücker, „Short-time Work Benefits Revisited: Some Lessons from the Great Recession“, Economic Policy, Vol. 68.

2 “Germanys jobs miracle hasn't received much attention in this country - but its real, its striking. Germany came into the Great Recession with strong employment protection legislation. This has been supplemented with a "short-time work scheme", which provides subsidies to employers who reduce workers' hours rather than laying them off. These measures didn't prevent a nasty recession, but Germany got through the recession with remarkably few job losses.” Paul Krugman, New York Times, November 12, 2009

3 STW take-up rates in Germany and the US, Sources: US Labour Department, BA Statistics and OECD.

4 Employment, hours worked and real GDP in Germany and the US, Sources: IMF and OECD.

5 Outline  The case for STW benefits  Why do STW take-up rates differ across countries?  Do STW benefits really reduce excess lay-offs?  Are STW benefits really temporary?  Policy conclusions

6 How do STW benefits work: Theory  If output is produced by a standard multiplicatively separable production function where labour consists of the number of workers and working hours …  … then cost-minimization requires that the total adjustment to scale of production is at the extensive margin, i.e. via lay-offs, while the number of working hours remains constant  STW benefits shift balance to intensive margin, since benefits are paid conditional on reduced working hours

7 The case for STW: pros and cons  STW contributes to internalize social costs of lay-offs  If experience-rated UB-EPL (Blanchard and Tirole, 2007) is not possible, good to combine UB with STW  Even more so, if wages are downward rigid  But: STW is distortionary since allocation of working hours and number of workers is suboptimal  May postpone industrial restructuring  Favours insiders vs. outsiders  Similiar moral hazard problems as UB  Thus: STW should be temporary

8 STW take-up rates vary widely across OECD Sources: OECD; Hijzen and Venn 2011; own calculations.

9 Why do STW take-up rates vary? STW are multidimensional institutions, which vary by  strictness of eligibility criteria (e.g. minimum UB contribution period, agreement with worker council),  strictness of entitlement criteria (e.g. on-the-job training, job search requirements),  costs for employers,  responsiveness of hourly wages to hours reduction,  replacement rate at minimum hours of reduction and replacement rate at maximum hours of reduction. Moreover, complementary institutions affect STW take-up:  Generosity of UB, EPL

10 Explaining STW take-up rates

11 Thus, STW take-up rates …  increase with strictness of employment protection  decline with generosity of UB  increase with bargaining centralization  increase with STW replacement rate  decline with strictness of entitlement and eligibility criteria  decline with cost contribution of employers

12 Do STW really save jobs? Macro evidence  Cross-country regression with quarterly data based on where  e is employment, y output (GDP), STWR the STW take- up rate (in% of employment), EPL an employment protection index, i the country index, t the time index and Δ the difference operator.  γ 1 measures the impact of STW on employment when output change is zero,  γ 2 captures the way STW affect the responsiveness of employment to output changes.

13 Macro regression results

14 Thus, implied number of jobs ‘saved’ depends on output decline

15 Implied macro estimates of jobs saved

16 Do STW really save jobs? Micro evidence  Micro evidence from IAB establishment panel, an annual survey of 16,000 firms  Regression equation:,,,  where e is employment, STW the share of workers participating in STW, WTA the share of workers participating in working time accountrs and η a vector of controls.  Working time accounts (WTA): a mechanism which facilitates adjustment at internal margin via credit in working hours which workers receive for overtime work.

17 Estimates of jobs saved by STW and WTA

18 Summary of findings  Micro estimates imply that STW has saved 435,000 jobs in Germany and WTA 320,000 jobs, respectively  Micro estimates point to smaller deadweight losses compared to macro estimates  However, deadweight losses are likely to exist in all countries

19 Are STW really temporary? Germany vs. Italy  After Belgium, Germany and Italy have together with Japan the largest STW schemes in the OECD  The German system is explicitly designed for temporary adjustments, while the Italian schemes allows also for structural adjustment (CIGS)  The German system involves higher degree of exerience-rating  Both systems have job-search requirements, better enforced in Germany  The German system unlike the Italian system strongly discourages reduction of working hours toward zero

20 Hourly costs per working hour at hours worked in % of standard working hours in DE and ITA

21 Elasticity of STW take-up rate to economic activity: Rolling regression results

22 Total STW hours (monthly average) in Italy and Germany

23 What can we learn from the Great Recession?  ‚Flexicurity countries‘ and countries with decentralized wage bargaining take-up less STW than countries with strong EPL and centralized bargaining  Beyond measurement error on the number of jobs saved, some deadweight losses seem to be unavoidable  Temporary workers don‘t benefit from STW  Job-search requirements, co-financing by employers and disincentives to reduce working hours to zero make STW more temporary and cyclically more sensitive.  Cyclically adjusted contribution rates may circumvent employers‘ liquidity constraints

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