Page 6 - IDEA Kurzarbeit zahranicni zkusenost Covid19 duben2020 13

SHORT-TIME WORK AND RELATED MEASURES TO MITIGATE
THE CONSEQUENCES OF A (PARTIAL) ECONOMIC SHUTDOWN IDEA 2020
A. Costs of Adjustment to the Transitory Reduction of Economic Activity
Causes and examples
Employers are enduring reduced revenues, so they may not be able to pay workers. Even if that problem is alleviated or solved by subsidies covering wages or by temporarily laying off all workers, other costs continue which may force many employers out of business. There is widespread agreement that both the costs of breaking (otherwise viable) ties between employers and employees and the costs of destroying (otherwise viable) firms are very high.3 At the same time, the incomes of employees are reduced. The consequences of mild, transitory reductions in income are debatable. Further reductions in demand speak for government action, but the reduced spending capacity of individuals and their increased capacity to replace monetary costs by time speak against it. However, it is clear that individuals facing steep income drops and/or steep increases in expenses as well as individuals that were at the brink of hardship already are likely to engage in adjustment behavior (from changing jobs and selling assets all the way to actual hunger and engaging in social unrest), the costs of which are likely much higher than transfers.
In economic terms, these costs arise from two well-known problems: (1) The fixed cost problem, which prevents both employers and employees from instant, lossless adaptation to changes. (2) The problem of declining marginal utility combined with imperfect consumption smoothing that motivates transfers and insurance for the poor, and anti- cyclical programs such as unemployment insurance.
Bottom line
Both suspending the economy (i.e. temporarily suspending economic activity) and keeping the suspended economy in a state from which it can seamlessly be “woken up” lead to costs arising from individuals adjusting to the state of suspension. The key to minimizing these costs is to minimize changes in economic behavior in response to purely transitory problems. The most severe consequences of such responses likely arise from responses to extreme hardship for individuals and companies that struggle to survive short term loss of revenue, leading to businesses or jobs being destroyed unnecessarily. Overall, these costs point toward the desirability of implementing policies that disincentivize changes during the suspension of economic activity.
3 See for example agreement on the statement by Kopczuk, which states that “continuity of employment is critical” and “the disappearance of otherwise viable businesses will further hurt the recovery”.
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