Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/236360 
Year of Publication: 
2021
Series/Report no.: 
IZA Discussion Papers No. 14329
Publisher: 
Institute of Labor Economics (IZA), Bonn
Abstract: 
In the Covid-19 crisis, most OECD countries use short-time work schemes (subsidized working time reductions) to preserve employment relationships. This paper studies whether short-time work can save jobs through stabilizing aggregate demand in recessions. We build a New Keynesian model with incomplete asset markets and labor market frictions, featuring an endogenous firing as well as a short-time work decision. In recessions, short-time work reduces the unemployment risk of workers, which mitigates their precautionary savings motive and aggregate demand falls by less. Using a quantitative model analysis, we show that this channel can increase the stabilization potential of short-time work over the business cycle up to 55%, even more when monetary policy is constrained by the zero lower bound. Further, an increase of the short-time work replacement rate can be more effective compared to an increase of the unemployment benefit replacement rate.
Subjects: 
short-time work
fiscal policy
incomplete asset markets
unemployment risk
matching frictions
JEL: 
E21
E24
E32
E52
E62
J63
Document Type: 
Working Paper

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