This is what you need to know about short-time work

Short-time work schemes are a fiscal stabiliser in Europe. Between 2010 and 2013, they were used by 7% of firms, employing 9% of workers in the region. This column uses ECB data to show that firms use the schemes to offset negative shocks and retain high-productivity workers. High firing costs and wage rigidity increase the use of short-time work, which in turn reduces the fall in employment brought on by a recession.

Short-time work (STW) schemes are an important fiscal stabiliser in many countries. In the Great Recession, 25 out of 33 OECD countries used such schemes (Balleer et al. 2016). The schemes aim to preserve employment in firms temporarily experiencing weak demand. This is achieved by providing subsidies to firms to reduce number of hours worked by each employee, instead of reducing the number of workers. Using the subsidy, workers are paid for both hours worked and for hours not worked – albeit not completely compensating the loss of income due to their reduced hours. In most countries, the bulk of the subsidy is paid by the state, although companies can also contribute.

STW is appealing from a risk-sharing perspective, because it spreads negative shocks across more workers. If hiring and firing costs are high, it can also be more efficient than the alternative. In some countries, such as the UK, there is no official scheme, but in other countries, official schemes are a core part of the institutional labour market infrastructure. Furthermore, as Cahuc and Nevoux (2017) point out, countries such as France created temporary expansions of these schemes during the recession that have since become permanent.

In a recent paper (Lydon et al. 2018), we use data from the third wave of the ECB Wage Dynamics Network Survey (WDN3, see ECB 2014) to investigate what determines take-up of STW schemes, and their wider economic effects. The survey asks firms how they adjusted their labour inputs – both in quantity (employees and hours) and in wages – in response to shocks between 2010 and 2013. The sample of just less than 25,000 firms across 20 EU countries, including the UK, represents a population of 5.5 million firms and 95 million workers.

Between 2010 and 2013, short-time work was used by 7% of European firms, employing 9% of workers (Figure 1).

Figure 1 Short-time work take-up in Europe, 2010-13

Workers in these firms, while facing a subsidised reduction in their hours, were far less likely to lose their jobs during the Great Recession, as Figure 2 illustrates for manufacturing firms.

Figure 2 Demand shocks, employment adjustment and short-time work take-up

Who uses short-time work and why?

If STW plays such an important role in how firms react to shocks and how workers are affected, we want to understand what determines take-up. First, it is important to control for the shocks firms experienced. Two types of shocks appear to matter: negative demand shocks and shocks affecting firms’ ability to access finance for their business activities make them much more likely to use STW. Our interpretation is that reduced access to finance makes it more difficult for firms to weather cyclical downturns, prompting them to reduce labour costs through short-time work or other means.

STW schemes are a flexible way for firms to retain workers when demand is temporarily weak. As more productive workers are more valuable to firms, regardless of the level of demand, there is a greater incentive to use short-time working schemes for these workers.

Worker productivity is not recorded directly in WDN3 survey, but the share of high- and low-skill workers and short- and long-tenure workers is. Assuming these measures are positively correlated with productivity, we expect take-up to be greater in firms with higher shares of these types of workers, which is what we find (Figure 3). In fact, for firms with a very high proportion of long-tenure workers (90%+) STW take-up is more than double that of firms with low average job-tenure levels.

Figure 3 Short-time work take-up in high-skill (panel A) and long-tenure (panel B) firms

Institutional factors are also important for STW take-up. Scheme characteristics, such as how easy it is for workers and firms to adopt STW, affects take-up. STW's interaction with other labour market institutions is equally important – for instance, take-up is higher in countries with more stringent employment protection legislation.

Another institutional factor, if we can call it that, is downward nominal wage rigidity – that is, the inability of firms to reduce wages, due, for example, to the effects on morale or because it is too hard to do. Theory suggests that firms that have to reduce labour costs are more likely to use STW if wages are more rigid.

To explore this, we construct a continuous measure of downward wage rigidity at the country-sector level along the lines of Dickens et al. (2007), where zero reflects fully downward flexible wages, and 100 completely rigid. We find that downward wage rigidity does matter for STW take-up. In sectors with low or medium levels of downward wage rigidity, take-up is low (5%). In contrast, STW take-up jumps to 10%, and then 14%, in firms with ‘high’ and ‘very high’ levels of wage rigidity.

Figure 4 Downward wage rigidity and short-time work

Does short-time work take-up matter in aggregate?

STW clearly shelters individual workers or firms from the worst effects of recessions. The question of whether it has a significant aggregate impact is the focus of several country-specific papers (Balleer et al. 2016, for Germany, is one example).

To answer this question using the WDN3 data, we divide countries and sectors into those with high levels of STW take-up (in which more than 10% of firms use STW in the country-sector) and those with low levels (in which fewer than 1% of firms use STW). Using Eurostat data on employment and output per sector from 2008-13, we then estimate the response of employment to falls in output for high- and low-STW sectors.

Figure 5 shows the results in the form of the responses of employment to a 1% fall in output. The fall in employment is considerably lower for high-STW sectors, where it peaks at 0.12% after three to four quarters. In low-STW sectors, by contrast, the employment fall peaks at the much higher level of almost 0.40%,after just two quarters. This suggests that STW can have significant aggregate effects, smoothing changes in overall employment through the cycle.

Figure 5 Effect of short-time work on the response of employment to a fall in output, by quarter after shock

Conclusion

Economic theory as to why firms might use STW schemes is completely backed up by the data – negative shocks, higher firm-specific human capital, labour market institutions that increase firing costs, and greater levels of wage rigidity all push firms towards these schemes. We also provide some evidence that the presence of STW schemes can reduce the fall in employment brought on by a recession.