Field: Strukturomvandling

Effects of short-time work – lessons from the financial crisis

The largest support measure for companies affected by the pandemic

In 2020, Sweden provided around 90 billion SEK in direct financial corona support for companies. The single largest support program is short-time work. Under the short-time work scheme, employers can reduce labor costs by reducing employees’ working hours. At the same time, employees retain most of their usual salary as the government covers most of the costs.

The main purpose of the scheme is to provide support for firms facing a temporary decline in demand to retain jobs that have become unprofitable in the short-term but are viable in the longer run. The scheme is not without risks though. Subsidizing workers to remain with a particular firm can reduce the reallocation of labor to more productive jobs and firms. This hinders the expansion of more productive firms, yielding negative effects on aggregate employment and output.

Lessons from the financial crisis can form the basis for a discussion of possible effects

Empirical evaluations of the Swedish short-time work scheme during the pandemic are still in the future. However, a great deal of knowledge and lessons exist from the international use of similar support schemes during the financial crisis. In this memo (referred to as Effects of short-time work – lessons from the financial crisis), this knowledge forms the basis for a discussion of possible employment and productivity effects in Sweden during 2020.

It saved jobs during the financial crisis, but had negative effects during the economic recovery

Empirical evaluations of the international use of short-time work during the financial crisis point toward three robust employment effects:

  • In total, short-time work saved jobs during the crisis years 2008–09.
  • In general, the positive employment effects stem from the use of short-time work during economic downturns. When used during economic recoveries – quarters with positive employment growth – it instead hampered the labor market’s recovery.
  • The scheme saved permanent jobs but had no effect on the number of temporary jobs.

Limited research on GDP and productivity effects

A significantly smaller literature has evaluated the output and productivity effects of short-time work in connection to the financial crisis. Available evidence suggest that short-time work caused a decrease in the allocative efficiency of the labor market, resulting in output losses. This was due to a reduction in the number of total hours worked and less expansion of the most productive firms. However, there is also some evidence that the policy, when used in moderation, helped to restart long-term viable firms after a temporary economic downturn. Overall, there is a great deal of uncertainty about the relative size of these positive and negative effects.

Possible employment effects during the pandemic: Initially saved jobs, but negative effects thereafter

If the estimated effects of short-time work during the financial crisis is used to predict possible employment effects in Sweden during the pandemic, it suggests that over 100 000 Swedish jobs were saved thanks to short-time work in 2020. This outcome is however only due to the use during the economic downturn in the second quarter of 2020. The continued high use of short-time work in the economic recovery that followed is instead predicted to have had negative employment effects. That is, the policy’s total employment effect would have been even more positive had fewer workers been on short-time work during the second half of 2020.
In terms of output effects, it is yet not possible to sketch possible scenarios based on previous research. However, the limited research from the financial crisis suggests that longer periods of short-time work are likely associated with an increased risk of negative outcomes.

Effects of short-time work – lessons from the financial crisis

Serial number: PM 2021:09

Reference number: 2021/5

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