• Optimal Short-Time Work Policy in Recessions (JMP) [Link to Paper]

Abstract: Short-time work (STW) is a subsidy program linked to hours reduction that has been widely used around Europe to combat job losses in the Great Recession and the COVID-19 pandemic. Although typically used alongside an unemployment insurance (UI) system, the interaction between STW and UI remains conceptually unclear. To close this gap in the literature, I develop a search and matching model of the labor market with risk-averse workers, flexible hours choice, endogenous separations, and generalized Nash-Bargaining. Deriving closed-form expressions, I demonstrate that while the UI system provides income insurance to workers, the STW system mitigates the fiscal externality of UI-induced separations. Notably, STW only exists due to the UI system. Reflecting European practices, I allow the STW system to adjust over the business cycle while keeping the UI system constant. In line with the actual policy, my findings indicate that STW benefits have to increase in recessions, while in contrast to the actual use of STW, eligibility criteria have to be tightened. Interestingly, using UI with an optimal STW system is fiscally less expensive than the UI system on its own.  

• Optimal Short-Time Work Policy and Allocative Efficiency

Abstract:  Short-time work (STW) is a subsidy program linked to hours reduction. It emerged as the central labor market instrument to combat unemployment in several European economies during the COVID-19 pandemic. As the scope of the instrument expanded, concerns arose about its impact on allocative efficiency: Does optimal STW policy impede the efficient reallocation of workers from less to more productive firms? To explore this issue, I develop a search and matching model of the labor market, where information asymmetry prevents the government from distinguishing between temporarily and permanently unproductive firms. My findings reveal that STW systems inherently reduce allocative inefficiency. By linking subsidies to reduced working hours, the government can effectively screen for permanently unproductive firms, thereby mitigating allocative inefficiencies. However, while preventing all worker misallocation is possible, it is not optimal. Subsidizing reduced working hours can incentivize workers to choose suboptimal low working hours. Therefore, I propose structuring benefits to decrease progressively over time, enhancing the screening for permanently unproductive firms.

• Optimal Short-Time Work Policy vs Optimal Lay-Off Taxes (with Johannes Weber)

Abstract: The unemployment insurance (UI) system in the US is experience-rated, while Europe relies on a combination of short-time work (STW) and UI. In a search and matching model with risk-averse workers, risk-neutral employers, flexible working hours, and generalized Nash-Bargaining, I show that STW has the same purpose as an experience rating system, represented as a lay-off tax: Internalize the fiscal externality of the UI system. Which system is more efficient? In the canonical model, lay-off taxes dominate the STW system. While lay-off taxes can implement the efficient number of separations, STW has to trade off the efficient number of separations against distorting working hours. However, if firms become financially constrained, lay-off taxes lose their impact, while STW stays equally effective in reducing inefficient separations. Furthermore, under financial constraints, firms lose their ability to insure workers against income shocks. STW becomes even more advantageous by providing income insurance for workers in financially constrained firms.

• Optimal Short-Time Work Policy and Precautionary Savings in Recessions