Success model with side effects: what good is short-time working in the corona crisis?

The short-time work allowance enables companies to reduce costs in a crisis without having to lay off employees. This will prevent hundreds of thousands of layoffs in the pandemic. However, there are also pitfalls. A model between recovery and deadweight effects.

When people talk about short-time work benefits, words such as "export hit" or "model of success" are often used. In fact, the concept is in greater demand than ever during the Corona crisis: According to estimates by the Ifo Institute, almost 3.3 million employees were on short-time work in October, and the most in May, at 7.3 million. For comparison: During the financial crisis, the peak in May was around 1.5 million people on short-time work.

"Short-time work plays an important role in coping with the Corona crisis in Germany," says Enzo Weber, head of research for forecasts and macroeconomic analyzes at the Institute for Employment Research (IAB). If there is a temporary external shock, short-time work is an excellent way to save jobs. It is true that one had to fight in April and May. "But measured against the gigantic economic slump, the labor market has remained pretty robust," says Weber.

The short-time work allowance enables companies to reduce costs in a crisis without having to lay off employees. The employees then only work to a limited extent at times or not at all. Companies only have to pay for the proportion of the work that is done. The Federal Employment Agency increases the salary of employees to 60 percent of the lost net salary, for employees with children to 67 percent.

In the Corona crisis, the following also applies: If employees had to cut their working hours by at least half, they will receive 70 percent of the lost net salary from the fourth month (77 percent for employees with children), and 80 percent from the 7th month (87 percent for employees) with children).

Short-time working allowance has prevented hundreds of thousands of layoffs

For April the Federal Employment Agency shows an increase in the number of unemployed by 308,000, in May by 169,000. In the following months, the number of unemployed grew much more slowly – as early as June, the Federal Agency identified a stabilizing effect of short-time work, and from September the number of unemployed fell. Also in November – during the new partial lockdown – fewer unemployed were registered. "In terms of preventing layoffs, the short-time work benefit worked very well," says Weber. The problem is rather the number of new hires, which is only progressing with difficulty.

So what if there was no short-time allowance? "Not everyone who was on short-time work would have been dismissed," said Weber. But you should have been prepared for a few hundred thousand, he says. "If you apply estimates from the financial crisis, you assume that the short-time work secured around half a million jobs that would otherwise have been lost," says Sebastian Link, economist at the Ifo Institute. "That would have been at least as many in this crisis."

In addition, according to Link, well-functioning companies would have had to lay off employees who would have needed them again immediately after the crisis. With the short-time work allowance, companies could "fall back on their well-rehearsed workforce", says Link.

Very different sectors affected than in 2009

If you compare the current situation with the financial crisis, you can already see a completely different use of short-time work, says Link. Sectors are currently being affected that were not so strongly or only indirectly affected at the time. Short-time working is a standard tool that is used in industry to cushion short-term fluctuations in demand. It was the same in the financial crisis.

"At that time, over 80 percent of the companies that were on short-time work were in the industry. Now, in this crisis, it goes beyond all sectors," says Link. Sectors are affected, such as retail or gastronomy, which had never before had short-time work. "Otherwise there are no such short-term fluctuations in demand in these areas, but rather long-term trends," says Link. "It's completely different now."

According to a survey by the Ifo Institute, travel agencies and tour operators are particularly affected by short-time working. In November, 91.1 percent of companies in this sector registered short-time work, a slight increase of around three percent compared to the previous month.

The situation in the hotel and restaurant business has become much more acute. In October, 62.9 percent of hotels were still affected by short-time work; in November it was already 91 percent. The same applies to the catering industry: Here, the proportion of companies with short-time work rose from 53.4 percent to 71.7 percent in November. The reason for this is obvious: The partial lockdown that has been going on since the beginning of November has hit these industries particularly hard: Hotels are only allowed to accommodate business travelers, restaurants are no longer open and their goods are only being delivered.

But the Ifo study also states that the increase is spreading through almost all major branches of the economy – from service providers to retail and construction. There has recently been a decline in short-time working in industry, the automotive sector, publishing and printing, among others.

"Sectors switched off by light switch"

Weber points out another difference between the current crisis and the financial crisis: "Corona was a very abrupt, deep thing and the financial crisis was a completely normal recession in view of its course," he says. It took her several months to get started and several months to leave.

The course of the corona crisis, on the other hand, was unusual: "Some industries were turned off like a light switch, but were also turned on again pretty quickly, so that there was a strong and rapid recovery effect," says Weber. That also explains why there is so much short-time work: "It was a big, striking shock." In addition, there was no major compulsion to justify companies, because everyone relied on short-time work. One could be pretty sure of the consent of the employees to short-time work.

Short-time working risks

But the concept of short-time allowance also contains pitfalls. "The big risk is that you will delay change, that you will preserve the structure and jobs as they are," says Weber. This is especially true of a transformative recession like the current one. Digitization, greening and structural change were already strong and intensified again during the crisis. "There is a great risk that jobs will be preserved that are no longer sustainable in this way after the crisis," says Weber. This risk must be reduced through a more systematic link with qualification of the persons concerned.

Link sees a similar risk: "We see in our survey data that a disproportionately large number of companies indicate that they are running short-time work that were worse off than their competitors before the crisis," he says. This indicates that there is more support for companies that had problems before the crisis.

Weber also sees possible deadweight effects, "that is, companies that make use of the short-time work allowance, but would not have laid off their employees without this means". That is not illegal, but it does not fulfill the immediate purpose of short-time work benefits. But that doesn't have to be a problem, Weber finds: "In the end, the short-time work allowance was also a liquidity support for the companies. Even if there is a deadweight effect – it is not necessarily wrongly invested to support liquidity in such a situation".

The article was published on December 1st by Capital.de.