DP13310 Subsidizing Labor Hoarding in Recessions: The Employment & Welfare Effects of Short Time Work
Short time work (STW) policies provide subsidies for hour reductions to work- ers in firms experiencing temporary shocks. They are the main policy tool used to support labor hoarding during downturns, and have been used aggressively since the start of the COVID-19 pandemic. Yet, very little is known about their employment and welfare consequences. This paper leverages unique administrative social security data from Italy during the Great Recession and quasi-experimental variation in STW policy rules to offer evidence of the effects of STW on firms’ and workers’ outcomes. Our results show large and significant negative effects of STW treatment on hours, but large and positive effects on headcount employment. We then analyze whether these positive employment effects are welfare enhancing, distinguishing between temporary and more persistent shocks. We first provide evidence that liquidity constraints and bargaining frictions make labor hoarding inefficiently low absent STW. Then, we show that adverse selection of low productivity firms into STW creates significant negative reallocation effects when the shock is persistent.