Short-time Work during the COVID-19 Crisis: Lessons learned

"During the COVID-19 crisis, the use of short-time work in Germany reached unprecedented levels, as during the financial crisis of 2008/2009, proving its usefulness as key rescue measure for the labour market. Quickly after the start of the crisis, the German government had considerably eased the conditions for firms and employees to receive short-time working benefits, extending the maximum entitlement period during which the benefits could be drawn and granting higher benefit levels after longer benefit receipt. In light of the high level of economic uncertainty, particularly at the beginning of the crisis, this gave firms a greater planning security with regard to their staff. Despite a rapid decline in short-time working as early as summer 2020, use remained at a historically high level up to the year 2022, after a second temporary peak in winter 2020/21. Germany was no exception among OECD countries in its heavy use of job retention schemes. Elsewhere, government measures to safeguard employment were also implemented on an unprecedented scale during the crisis. The German model of short-time work has served as a role model for many countries, since the financial crisis at the latest. The measures used internationally range from classic short-time work to wage subsidies, subsidies for periods of leave and bans on dismissals in times of crisis. However, some countries primarily relied on income transfers to employees. In addition, business aid programs played a major role in stabilizing firms. At the beginning of the COVID-19 crisis, the use of job retention schemes in Germany was rather below average compared with other countries, but it declined much more slowly than in most other countries. This was partly due to the fact that in many countries, force majeure measures were activated on a large scale at the beginning of the crisis, and these measures often expired in 2020 or 2021 at the latest, i.e., at a time when the economic recovery was on its way faster than previously expected. This research report investigates the development of the use of short-time work in Germany and compares it with the use of employment stabilization measures in the US, Australia, France, Italy, and Spain. The stabilizing effect of short-time work was also evident in the European countries considered here, France, Italy, and Spain. These countries made it even easier to use short-time work. It is noteworthy that with the strong use of short-time work Spain, for example, succeeded for the first time in noticeably mitigating the effects of a GDP decline on employment, while a comparable effect of securing employment was not observed in the USA key reason for this is probably that the U.S. short-time work program - not applied in all states - could not be scaled up in the same way as in Europe. In contrast, Australia succeeded in securing employment with an alternative to short-time work, namely a wage subsidy. The use of short-time work in Germany was made easier because it was possible to build on an established instrument and the experience gained with it during the economic and financial crisis. Irrespective of this, the use of short-time work on a massive scale by local standards has reached its administrative limits, particularly concerning the high degree of flexibility in the amount of possible work loss of individual workers compensated for and the multi-stage procedure for applying for and settling short-time work. In contrast to Germany, countries such as France, Italy and Spain referred to force majeure when relaxing their regulations in the context of the COVID-19 crisis. The enormous use of wage subsidies in Australia was the response to the severe consequences of the crisis. There are opportunities and risks associated with declaring such an exceptional situation. If access rules are strongly simplified and benefits made more generous in such a situation, the likelihood of heavy use increases. The goal of stabilizing employment and the economy in the short term can thus be achieved more easily. At the same time, however, the risk of unintended negative incentive effects, such as windfall gains, which have been observed in Italy and France and especially in Australia, increases. The research report also discusses lessons from the international comparison for the debate in Germany. Basically, in times of a severe economic crisis, countries face the difficult trade-off between (desirable) stabilization effects on the one hand and (undesirable) efficiency losses on the other. The main possible disincentive effects are free riding and the risk of maintaining non-viable firms and slowing down reallocation processes to new, promising fields of business activity. As the international comparison shows, there are three approaches to limiting or compensating for disincentives: Appropriate exit scenarios, suitable models of co-financing by firms, and incentives to strengthen the transformation of the economy. To take account of the cost efficiency of short-time work, the OECD favours co-financing by firms, the argument being that a long use of short-term work can slow down economic transformation processes. Whether and to what extent this has actually happened cannot be ascertained for the various countries based on what is known so far. The descriptive evidence for Germany shows that long periods of use were only observed for a very small proportion of firms. In order to reduce disincentives for long use, incentives to end short-time work could be introduced. One possibility is the introduction of an "experience rating" scheme. Firms that use short-time work to a large extent and for a long time during difficult times would have to know in advance that they would then have to make repayments or pay higher contributions in normal times. The revenues could then serve as a reserve for future crises. Similar arrangements exist in Italy and under the short-time work program which is part of the U.S. unemployment insurance system. In order to further counteract an inappropriate preservation of business models through short-time work, the scheme could be used to an even greater extent to support structural change by means of appropriate supplements. Some countries (especially France and Spain) were more successful than Germany in combining short-time work with training. Spain is of particular interest in this context because, in addition to training, incentives were introduced to encourage workers to leave short-time work by fostering mobility at an inter-company level. Finally, especially in times of severe crises, the use of short-time work must take into account distributional issues. As an insurance benefit, short-time work in Germany, like unemployment benefits, is subject to the equivalence principle and is restricted to employees subject to social insurance contributions; mini-jobbers and the self-employed are not covered by it. In the U.S., for example, the existing short-time work program, which was only used to a limited extent, was extended to the self-employed. If in severe and protracted crises special regulations are used that aim to increase wage replacement rates, one could consider, instead of increasing rates over the course of the reference period (as has been done in Germany), focussing on increasing wage replacement rates for workers with low incomes, similar to the case of France. In the absence of insurance coverage, as in the case of the self-employed and mini-jobbers, appropriate income support schemes to compensate for hardship should be considered in the event of a severe crisis, similar to what has been done in the U.S.. In Germany, this was done, for example, through simplified access to basic benefits or, most recently, through subsidies in the context of the energy crisis." (Author's abstract, IAB-Doku) ((en))