This is a better way to stabilize employment

Short-time working allowance means that the working hours in the affected companies are reduced more than necessary. There is a better alternative. A guest post.

DIW surveys show that more than half of employees would like shorter working hours.  However, most of them cannot afford to do so without compensation for the lost wages.

IIn March, most economists agreed that short-time work was helpful in the Corona crisis. While unemployment figures exploded around the world, Germany saw only a moderate increase because almost 7 million people “only” went on short-time work instead of unemployment and thus still worked 56 percent of their regular hours. In this respect, short-time work has given us time to deal with the unexpected crisis. Now, however, a dispute has flared up among economists about the planned increase in the maximum possible duration of short-time work allowance to 24 months. Some warn of the “zombification” of the economy, because non-competitive companies are artificially kept alive and employees on short-time work are too little looking for new jobs. As a result, structural change is slowing down. The others emphasize that the extension will reduce uncertainty, stabilize employment and support aggregate demand.

Both arguments are fundamentally correct, but only partially hit the core of the problem. Opponents overestimate the dynamics of structural change and overlook the fact that it can be macroeconomically desirable to avoid sudden spikes in unemployment. The proponents underestimate the possibilities of the social partners and also overlook the fact that short-time work creates incentives to reduce work volumes more than necessary.

Why is the argument of structural change, i.e. the systematic creation and reduction of jobs across companies and sectors, quantitatively less relevant than it initially appears? Although a large proportion of all employees change employers in a typical quarter, around seven percent, only a small proportion of these changes are associated with permanent job creation or reduction. Rather, the employee’s personal circumstances are often the main motive for a change, and the position that has become vacant is filled again. Change, on the other hand, is mainly driven by young professionals and is a long-term process on which the extended short-time allowance should have little effect.

The more people are looking for work, the harder it is for the individual

In any case, Schumpeter’s argument of “creative destruction” is opposed to the macroeconomic argument of search externalities. Workers spend time and effort trying to find a suitable job. The more people search at the same time, the harder it is for the individual; his individual commitment is devalued. It’s like on the motorway: if too many people want to get from A to B at the same time, there will be a traffic jam and in the end everyone will get to their destination more slowly. So if a lot of car manufacturers are suddenly looking for a new job in the Stuttgart area, it won’t help anyone, and only social security will be charged.

Short-time working allowance therefore works a bit like a flow control on the motorway. The same applies to short-time working: the sharper the inflow peak and the shorter the time horizon, the greater the advantage of stretching the inflow of jobseekers into the labor market over time.