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On the efficiency of labor markets with short-time work policies

Author

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  • Peltonen, Juho

Abstract

This paper evaluates the social optimality of labor markets with search frictions and a job retention policy, named short-time work (STW), which has been applied in developed economies during the Covid-19 crisis. In a general equilibrium model, costs related to the STW cannot be internalized in wages, creating a systematic inefficiency through which job creation is too low. Government transfers to redistribute output to correct the inefficiency are proposed in the model. Furthermore, a calibration exercise matching the German economy over the period 2000-2021 suggests that transfers required for the social optimality are 1.9% of output. In addition, the unemployment rate is 1.8 percentage points lower in the presence of optimal transfers.

Suggested Citation

  • Peltonen, Juho, 2023. "On the efficiency of labor markets with short-time work policies," MPRA Paper 119165, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:119165
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    References listed on IDEAS

    as
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    Keywords

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    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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