Short-Time Work and Precautionary Savings

Thomas Dengler () and Britta Gehrke
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Thomas Dengler: Humboldt University Berlin

No 14329, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: In the Covid-19 crisis, most OECD countries use short-time work schemes (subsidized working time reductions) to preserve employment relationships. This paper studies whether short-time work can save jobs through stabilizing aggregate demand in recessions. We build a New Keynesian model with incomplete asset markets and labor market frictions, featuring an endogenous firing as well as a short-time work decision. In recessions, short-time work reduces the unemployment risk of workers, which mitigates their precautionary savings motive and aggregate demand falls by less. Using a quantitative model analysis, we show that this channel can increase the stabilization potential of short-time work over the business cycle up to 55%, even more when monetary policy is constrained by the zero lower bound. Further, an increase of the short-time work replacement rate can be more effective compared to an increase of the unemployment benefit replacement rate.

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)
Pages: 44 pages
Date: 2021-04
New Economics Papers: this item is included in nep-dge, nep-lab and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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