Short-Time Work and Precautionary Savings

Thomas Dengler, Britta Gehrke and Leopold Zessner-Spitzenberg

No 02/2024, ECON WPS - Working Papers in Economic Theory and Policy from TU Wien, Institute of Statistics and Mathematical Methods in Economics, Economics Research Unit

Abstract: During the Covid-19 crisis, most OECD countries used short-time work (subsidized reductions in working hours) to preserve employment. This paper documents that short-time work affects the behavior of firms (supply) and households (demand). First, using household survey data from Germany, we show that the consumption risk of short-time work is lower than that of unemployment. Second, we construct a New Keynesian model with heterogeneous workers and firms, incomplete asset markets, and labor market frictions. Short-time work weakens workers' precautionary savings motive and lowers labor costs. This reduces the level and volatility of both the separation and unemployment rate at the cost of tying workers to less productive firms. Quantitatively, the positive employment effects dominate the productivity losses.

Keywords: Short-time work; fiscal policy; incomplete asset markets; unemployment risk; matching frictions (search for similar items in EconPapers)
JEL-codes: E21 E24 E32 E52 E62 J63 (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-dge
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