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SHORT-TIME WORK AND RELATED MEASURES TO MITIGATE
THE CONSEQUENCES OF A (PARTIAL) ECONOMIC SHUTDOWN IDEA 2020
reduced, but making the replacement rate decrease in the share of hours reduced makes the marginal hour worked more attractive than the average hour and thereby incentivizes more work. At the same time, it allows desperate employers and employees to implement more severe work reductions at a cost to them. Thereby, it will keep more jobs alive and more companies in business. A lower replacement rate at higher work reductions also reduces the incentives for employers and employees to collude and claim subsidies for hours they still work (lowering policy costs).
In a similar vein, the policy should not deter employees from replacing their lost income with other sources of earnings, such as a second job, freelance and self-employment, nor should it deter flexible workers from temporarily switching jobs (such as taxi drivers delivering goods, etc.). The government can allow workers to top-up their short-time work earnings from other sources at the expense of a lower replacement rate, akin to income allowances in welfare programs and unemployment insurance. Doing so will not only reduce short-run adjustment costs, but can also reduce policy costs and will likely ease the adjustment after the crisis and thereby reduce long-run adjustment costs.
To further mitigate long-run adjustment costs, short-time work should subsidize as many jobs that are likely to survive in the long run as possible and keep the number of subsidized jobs that will disappear after the crisis low.9 Moving employees that are likely to be unproductive in their current jobs in the long run to unemployment insurance or ultimately welfare provides incentives to keep more productive jobs and see adjustments to the long-run state earlier. Expectations on job destruction change over time, so the choice between short-time work and unemployment insurance (or ultimately welfare) should dynamically adjust to change in expectations and real changes. Setting these incentives correctly is more difficult and riskier than the design choices above, as expectations may go awry and induce sudden swings. However, much can be gained from doing it well, because maintaining inefficient employees/jobs is a key downside of short- time work (and it is very easy to perpetuate it after the immediate crisis). It is particularly tricky to make the choice(s) above work well for both employers and employees. Both need to agree to engage in short-time work, but either can unilaterally opt for unemployment insurance or something else. The incidence of the cost can be used to tune incentives to particular situations.
9 Jobs with high continuation value on either side despite a high likelihood of destruction should be an exception.
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