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Short-time work and precautionary savings

Author

Listed:
  • Thomas Dengler
  • Britta Gehrke
  • Leopold Zessner-Spitzenberg

Abstract

During the Covid-19 crisis, most OECD countries used short-time work (subsidized reductions in working hours) to preserve employment. This paper documents that short-time work affects the behavior of firms (supply) and households (demand). First, using household survey data from Germany, we show that the consumption risk of short-time work is lower than that of unemployment. Second, we construct a New Keynesian model with heterogeneous workers and firms, incomplete asset markets, and labor market frictions. Short-time work weakens workers' precautionary savings motive and lowers labor costs. This reduces the level and volatility of both the separation and unemployment rate at the cost of tying workers to less productive firms. Quantitatively, the positive employment effects dominate the productivity losses.

Suggested Citation

  • Thomas Dengler & Britta Gehrke & Leopold Zessner-Spitzenberg, 2025. "Short-time work and precautionary savings," Berlin School of Economics Discussion Papers 0066, Berlin School of Economics.
    • Handle: RePEc:bdp:dpaper:0066
    DOI: 10.48462/opus4-5828
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    More about this item

    Keywords

    Short-time work; fiscal policy; incomplete asset markets; unemployment risk; matching frictions;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs

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