Discussion paper

DP16421 Should We Insure Workers or Jobs During Recessions?

What is the most efficient way to respond to recessions in the labor market?
To this question, policymakers on both sides of the pond gave two diametrically
opposed answers during the recent crisis. In the US, the focus was on insuring
workers, by aggressively increasing the generosity of unemployment insurance
(UI). In Europe, to the contrary, policies were concentrated on saving job matches,
with the massive use of labor hoarding subsidies through short-time-work (STW)
programs, on which so little is actually known. In this article, we try to understand
who got it right. Building on the vast literature on UI and on a recent stream of
papers on STW, we first provide a framework to determine the relative welfare
effects of STW versus UI. We then show that UI offers more insurance value than
STW, but tends to exhibit larger fiscal externalities, due to moral hazard. We finally
focus on how STW and UI affect labor market equilibrium and how this interacts
with inefficiencies in the labor market. We review recent evidence showing that
STW can be an effective way to reduce socially costly layoffs in recessions. Overall,
we conclude that STW is an important and useful addition to the labor market
policy-toolkit during recessions, with strong and positive complementarities with
UI.

£6.00
Citation

Giupponi, G, C Landais and A Lapeyre (2021), ‘DP16421 Should We Insure Workers or Jobs During Recessions?‘, CEPR Discussion Paper No. 16421. CEPR Press, Paris & London. https://cepr.org/publications/dp16421