We consider positive and normative aspects of subsidizing work arrangements where subsidies are paid in time of low demand and reduced working hours so as to stabilize workers’ income. In a matching framework such an arrangement increases labor demand. Tightening eligibility to short-time work benefits tends to reduce the wage while the impact on unemployment remains ambiguous. We develop a modified Hosios condition characterizing an efficient combination of labor market tightness and short-time benefit loss rate.
short-time work unemployment insurance employment subsidies