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Short-time work

Short-time working subsidies represent an example of marginal employment subsidies that are specifically designed to support jobs at risk. The intent of short-time working subsidies is to avoid involuntary dismissals, due to temporary reductions in product demand or access to credit, by inducing employers instead to reduce working time. Typically, these schemes provide government-financed income support or partial unemployment insurance. This helps to compensate for the loss of income due to the reduction in working time. Short-time working subsidies may be justified on both efficiency and equity grounds since they can correct for some of the inefficiencies of traditional unemployment insurance systems. Moreover, the burden of adjustments is more equally shared across the workforce.

In the current economic crisis short-time working programmes are of increasing interest from an international perspective. One reason is that the cost of displacement tends to be considerably higher in recessions due to the increased average duration of unemployment spells and the adverse implications that prolonged unemployment spells may have on future career opportunities. However, there may be at least two reasons why short-time work policies seem particularly apt in the current downturn. First, the combination of a cyclical downturn with a credit crunch may result in even more excessive layoffs than would be the case in a typical recession. A second reason why short-time working may be particularly timely in the current recession is that countries that have relaxed employment protection regulations in recent years and increased the scope for firms to make use of temporary employment contracts are looking for a substitute means to prevent excessive layoffs. Negative implications of short-time working schemes are that dead-weight and displacement effects are likely to be large. These programmes often keep wasteful jobs alive and slow down job reallocation remarkably when supporting jobs in sectors that are in structural decline. The best way to limit displacement effects is to ensure that the duration of short-time working subsidies is limited.

The current interest in short-time work policies is not new. A number of countries have been operating short-time working programmes for several decades. In Germany the management can request short-time work for its establishment if there is a temporary, unavoidable loss of employment due to economic factors or to an unavoidable event. It is available for all workers covered by the social security system with a loss of at least 10 per cent of gross monthly earnings. The employees receive for hours not working 67 per cent of the normal wage with at least one dependent child and 60 per cent for those without dependants. Recently, the German Government made some changes. They increased the maximum duration to 18 months, simplified the procedure and reduced the employer contributions for social insurance of short-time workers when training or qualification measures are undertaken while working short-time.

On the basis of the IAB Establishment Panel – a representative employer survey of employment parameters at individual establishments – one can analyse how German establishments use short-time working.

Finally, two elements are of crucial importance for minimising the negative side-effects of short-time schemes: these subsidies should be temporary and well-targeted to firms for whom the demand is only temporarily depressed and to workers who may find it particularly difficult to regain employment if made redundant.

Author: Dr Frank Wießner

 

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