On the efficiency of labor markets with short-time work policies

Peltonen, Juho (2023): On the efficiency of labor markets with short-time work policies.

Abstract

This paper evaluates the social optimality of labor markets with search frictions and a job retention policy, named short-time work (STW), which has been applied in developed economies during the Covid-19 crisis. In a general equilibrium model, costs related to the STW cannot be internalized in wages, creating a systematic inefficiency through which job creation is too low. Government transfers to redistribute output to correct the inefficiency are proposed in the model. Furthermore, a calibration exercise matching the German economy over the period 2000-2021 suggests that transfers required for the social optimality are 1.9% of output. In addition, the unemployment rate is 1.8 percentage points lower in the presence of optimal transfers.

• Item Type: MPRA Paper
• Language: English
• Keywords: Search and matching; Short-time work policies; Constraint efficiency; Endogenous separations
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E24 - Employment ; Unemployment ; Wages ; Intergenerational Income Distribution ; Aggregate Human Capital ; Aggregate Labor Productivity; J - Labor and Demographic Economics > J6 - Mobility, Unemployment, Vacancies, and Immigrant Workers > J64 - Unemployment: Models, Duration, Incidence, and Job Search

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