Temporary layoffs, short-time work and COVID-19: the case of a dual labour market

Purpose - This paper aims to study the type of short-time work (STW) schemes implemented in Spain to preserve jobs and workers’ incomes during the COVID-19 crisis and the corresponding labour market outcomes. Design/methodology/approach - A dynamic macroeconomic model of job creation and destruction of the search and matching type in a dual labour market. Findings - The model shows that the availability of STW schemes does not necessarily prevent a large increase in unemployment and job destruction. The quantitative effects depend on the degree of subsidization of payroll taxes and on the design of the policy. A scenario with a moderate degree of subsidization and where the subsidy is independent of the reduction in hours worked is the least harmful for both welfare and fiscal deficit. The cost of such a strategy is a higher unemployment rate. Concerning heterogeneous effects, the unemployed are the ones who experience the strongest distributional changes. Originality/value - The effectiveness of STW schemes in dual labour markets using a search and matching model in the context of the COVID-19 crisis has not been analysed elsewhere. The literature has emphasized the importance of dynamics, labour market institutions and workers’ heterogeneity to understand workforce adjustment decisions in the face of temporary shocks to de- mand especially when firms’ human capital is relevant. These elements are present in the model. In addition, this paper computes welfare and distributional effects and the cost of these policies.