“Over one million temporary workers lost their jobs at the beginning of the pandemic, as companies preferred not to include them in short-time work schemes”

Spain used a short-time work scheme called “Expediente Temporal de Regulación de Empleo” during the Covid-19 crisis. In this interview, Marcel Jansen, Associate Professor of Economics at the Autonomous University of Madrid (UAM), will explain how it worked, how it changed during the pandemic, and what lessons can be learned from the Spanish experience.

Did your country have any kind of job retention scheme during the Covid-19 pandemic to cushion the employment effects of economic crises?

Article 47 of the Spanish Statute of Workers includes a short-time work option which is known as “Expediente Temporal de Regulación de Empleo” (ERTE). It can either take the form of a temporary reduction in hours or a suspension of employment. Already at an early stage of the pandemic, the government introduced a specific scheme due to force majeure targeted at firms which were directly affected by the restrictions on mobility imposed during the state of alarm.

What were the objectives of the short-time work scheme used in Spain during the Covid-19 pandemic and how did the programme work?

“Expediente Temporal de Regulación Empleo” due to force majeure offered compensation to firms and workers for the hours not worked. At an early stage, the programme was free for firms as they obtained 100 percent of social security rebates and did not have to make mandatory transfers to their staff on short-time work for the hours not worked. Workers on their part received income support via unemployment insurance benefits.

From the summer of 2020 onwards, the compensation stopped being free for firms. The government gradually reduced the generosity of social security rebates. For the “Expediente Temporal de Regulación Empleo” scheme created in March 2020, the social security rebates were eventually reduced to zero at the end of 2021.

Job retention schemes have existed in Spain for decades.

Did Spain have any experience with applying short-time work schemes before the outbreak of Covid-19?

Job retention schemes have existed in Spain for decades. Before the pandemic, though, their take-up rate was insignificant – even during the profound economic and financial crisis from 2008 to 2014. Early in March 2020, the government introduced a specific “Expediente Temporal de Regulación de Empleo” scheme for force majeure with improved protection of the workers and simplified access for all firms affected by the restrictions on mobility. The main differences to the standard programme: All employees of the eligible firms are entitled to support, irrespective of the duration of employment with the firm or the type of contract; besides, the full social security rebates were– at least initially – free for firms.

Did the maximum duration of benefits provision change during the crisis?

Workers on short-time work schemes receive unemployment benefits. The maximum duration of such benefits is usually two years for workers who have paid contributions for at least six years. However, during the Covid-19 pandemic the prerequisite of a minimum contribution payment period was eliminated – all workers on “Expediente Temporal de Regulación de Empleo” due to force majeure received a benefit of 70 percent of their last salary with a maximum of around EUR 1,100 for the hours not worked. Contrary to regular unemployment insurance benefits, the replacement rate also remained constant over the time. Furthermore, the short-time work-related receipt of benefits during the pandemic did not affect the workers’ entitlement to unemployment insurance in the future. The duration of the benefits was initially linked to the duration of the state of alarm. When it ended in June 2020, the scheme due to force majeure was periodically extended thus preserving the entitlements to benefits of the workers in short-time work.

The enhanced protection of “Expediente Temporal de Regulación de Empleo” for force majeure still exists.

The benefit provisions are now back to normal for the regular “Expediente Temporal de Regulación de Empleo” scheme known as “Erte Top”, which targets economic, technical, organizational or production-related eventualities. So, the workers on short-time work are only eligible to benefits if they have paid social security contributions for at least twelve months, and its maximum duration is two years. However, the enhanced protection of “Expediente Temporal de Regulación de Empleo” for force majeure still exists. The 2021 labour market reform consolidated the programme for force majeure due to the restrictions or impediments imposed by the public authorities and introduced a new form of economy- or sector-wide short-time work termed “Mecanismo RED”. The government can activate this mechanism in two circumstances: a deep economy-wide contraction of business activity or structural transformation at the sectoral level that requires up- or reskilling of a substantial part of the workforce. In both cases, workers are entitled to the same enhanced protection as in the case of “Expediente Temporal de Regulación de Empleo” for reasons of force majeure, while the firms receive generous social security rebates (up to 100 %).

How did the eligibility criteria change during the Covid-19 pandemic?

During the pandemic, all eligibility criteria for salaried workers were temporarily suspended. Any employee of an eligible firm was entitled to a benefit, irrespective of the worker’s employment duration or contract type. Moreover, the government introduced a special line of assistance for workers on so-called discontinuous open-ended contracts who were inactive at the time when the state of alarm was declared. As a result, all salaried workers were eligible for support. But in practice, firms often excluded temporary workers from short-time work. As to the firms, all those that were subject to the restrictions imposed by the government could apply for “Expediente Temporal de Regulación de Empleo” due to force majeure. At some point, the renewals came with a full list of the National Classification of Economic Activities codes of sectors that were eligible for support due to force majeure. The rest of the firms could apply for standard benefits if the pandemic led to their economic distress. Alongside the “Expediente Temporal de Regulación de Empleo” scheme, the authorities also introduced benefits for the self-employed.

All salaried workers were eligible for support, but in practice, firms often excluded temporary workers from short-time work.

How did the benefit level of the scheme change during the crisis?

The government maintained the replacement rate at 70 percent of the workers’ salary throughout the pandemic with a maximum of EUR 1,098 per month. Parents with dependent children receive an additional subsidy of around EUR 150 per month if they have one child and around EUR 350 euros per month for two or more children. There is no obligation for employers to top up the benefits nor do collective agreements oblige them to do so.

How is the “Expediente Temporal de Regulación de Empleo” scheme financed?

In regular times, the benefits are financed through unemployment insurance contributions. During the pandemic, by contrast, the benefits were largely paid out of general means financed through the emission of public debt and loans under the “European programme for temporary Support to mitigate Unemployment Risks in an Emergency” (SURE).

The government promised to establish a fund to finance the future benefits associated with the newly created “Mecanismo RED” short-time work scheme. The details are still unclear, but in principle the government intends to use the surpluses from the unemployment insurance benefit system as the principal source of funding.

What was the maximum take-up rate in 2020 and in 2021?

The number of workers on “Expediente Temporal de Regulación de Empleo” reached a maximum of almost 3.6 million at the end of April 2020, which corresponds to 23.5 percent of salaried employment in the private sector. Almost 3.2 million of these workers had their contracts suspended. In 2021 the maximum number was reached in January with more than 900.000 workers, a share of 6 percent.

These restrictions are not only very strict by international comparison, but also much stricter than those on the standard short-time work applied before the pandemic.

Are there any measures to avoid deadweight losses and misuse by the firms that receive financial support but actually do not need it?

From the very start, the government imposed strict conditions on firms. The firms that received support were not allowed to lay off any of the supported workers until six months after they reactivated the first staff member on short-time work. Any firm that violated this commitment had to repay the entire support and social security rebates it had received up to that moment for all of the workers who had been on the programme at one point. The firms were neither allowed to recruit other workers nor to demand that their active staff members do overtime. These restrictions are not only very strict by international comparison, they are also much stricter than those on the standard short-time work schemes applied before the pandemic.

In addition to this, as already mentioned above, the “Expediente Temporal de Regulación de Empleo” scheme stopped being free for firms after an initial period of several months. In successive steps, the social security rebates were reduced from 100 percent to 0 percent, which was decided in March 2020. Full social security rebates were only maintained for firms that needed to close down their activities due to lockdowns in the subsequent waves of Covid-19.

Once the state of alarm was lifted, employees on short-time work were allowed to top up their income by working part-time for other, not supported employers.

Did the support system, in your view, slow down the necessary reallocation processes in the economy?

We currently lack any formal evaluation of the system during the pandemic to assess this question. But I think it is fair to say that the authorities made a comparatively strong effort to avoid delays. Spain was among the first countries to reduce the generosity of schemes for firms and in the summer of 2020, it introduced generous social security rebates for reactivated workers who returned to their jobs; at some point, the social security rebates for reactivated employees were even larger than those for the employees who remained on short-time work. Furthermore, once the state of alarm was lifted, employees on short-time work were allowed to top up their income by working part-time for other, not supported employers.

Last but not least, it is important to mention that the duration of “Expediente Temporal de Regulación de Empleo” was initially linked to the state of alarm. As a consequence, it had to be renewed every two weeks. From the summer onwards, the duration of the scheme was periodically extended for the periods of up to several months. This contrasts with the situation in other member states of the European Union with maximum durations of up to two years.

Is there a financial incentive for employers to offer on-the-job training for their employees while receiving support?

Before the pandemic, there were no financial incentives for training nor did the law oblige firms to offer training to those on short-time work. In the final stages of the pandemic, however, the government gave in to calls from experts and granted the benefit recipients a privileged access to training provided by the Public Employment Services.

In the future, firms will be obliged to present a training plan if they wish to receive support under the newly created sectoral-level short-time work schemes (“Mecanismo RED”). The law stipulates that the training expenses will be reimbursed by the same fund that will finance the benefits received under the RED scheme. The size and duration of these training incentives are unclear for the moment though.

While salaried workers’ participation in training activities increased substantially during the pandemic, it remains unclear to what extent this additional training activities can be attributed to the measures by the government.

In the final stages of the pandemic, the government granted the benefit recipients a privileged access to training provided by the Public Employment Services.

Have there been incentives for benefit recipients to look for a new job?

Yes. Following the recommendations by external experts, the government introduced the option for those on short-time work to perform paid part-time activity for other firms that had no staff on short-time work. Full compatibility of this additional salary with the benefits provided a strong economic incentive for workers to take up other jobs.

What is your assessment of the general effectiveness of the job retention schemes aimed at cushioning employment effects of the crisis in your country?

The “Expediente Temporal de Regulación de Empleo” scheme was by all means a success even if the regulation was too rigid and its numerous renewals created a high degree of uncertainty among employers. One indication of this scheme’s success is the quick return of aggregate employment to pre-pandemic levels. In fact, employment fell by much less than output for the first time in Spanish history. There is no detailed information on the percentage of workers who remained with their initial employer, but the available data suggest that this percentage is similar to the experience in other countries.

The Spanish force majeure-related job retention scheme was introduced within days of the lockdown and drew on the experience of a small-scale programme to protect the employees of a factory in the Spanish city of Burgos that burned down some years before the pandemic. The benefits were paid by the Public Employment Services to workers rather than firms. This led to substantial delays in the payment of benefits. By contrast, the applications were resolved within a maximum period of five days, either by an explicit decision of the Public Employment Services or by tacit administrative approval.

The government was repeatedly advised to switch to a system in which the payments to workers are made by employers rather than the public administration. In this system, delays are much less likely and the Public Employment Services do not need to make transfers to individual workers. The government refused to make this switch during the pandemic and it is not contemplated in the 2021 reform.

The reform actually makes an effort to harmonize the procedures for the different types of “Expediente Temporal de Regulación de Empleo”. Moreover, the existing procedures made it easier to suspend a contract rather than to reduce hours during the pandemic. The reform corrects this issue and favours hours reductions over contract suspension.

The Spanish job retention scheme drew on the experience of a small-scale programme to protect employees of a burned down factory in the Spanish city of Burgos some years before the pandemic.

When are the special rules applied during the pandemic due to be phased out and how is the termination justified?

In the case of “Expediente Temporal de Regulación de Empleo” that was implemented at the start of the pandemic, the government gradually reduced the social security rebates to zero. Additionally, at the end of 2021 all remaining support of this type had to be renewed thus obliging the firms to keep the workers on the scheme for further six months upon termination of the programme. For the firms that were still subject to this commitment as they reactivated the first employee less than six months before the renewal, the six-month period came on top of their remaining commitment period. The renewal also meant a move from “Expediente Temporal de Regulación de Empleo” due to force majeure to the regular programme for economic reasons (ETOP).

With the exception of a few remaining travel agencies, all of the short-time work schemes due to force majeure have ended by now. Yet, in 2021 the figure of the schemes due to force majeure consolidated as a consequence of restrictions imposed by the public authorities. They imply that the authorities can automatically activate the short-time work schemes in case of a future pandemic.

Is there a political debate on whether to include elements of experience rating in the national job retention scheme?

For the moment, the issue of experience rating is not on the agenda. The benefits for regular “Expediente Temporal de Regulación de Empleo” termed ETOP are paid out as regular unemployment insurance benefits, and unemployment insurance contributions are not subject to experience rating in Spain. As to the newly created “Mecanismo RED”, the government intends to transfer the surpluses from the insurance system to a fund and in this case there are no references to experience rating either.

Which lessons can be learned from the use of “Expediente Temporal de Regulación de Empleo” during the Covid-19 crisis in Spain?

The excellent experience with the Spanish scheme during the pandemic should motivate policy makers to include it in their standard tool box. It may also be a good idea to follow the Spanish example and to create provisions for short-time work with enhanced protection that can be activated in particularly adverse conditions. Nonetheless, it should be noted that “Expediente Temporal de Regulación de Empleo” is a tool to address sharp, temporary contractions in demand. It should not be used if firms or entire sectors need to downsize due to structural changes in the economy, as was the case in the 2008 recession.

Finally, the experience in Spain shows that there is a clear trade-off between the stringency of the rules and the take-up rate of the programme. In practice, short-time work additionally offered excellent protection to workers on open-ended contracts while many of those with non-standard contracts were left without sufficient protection. Over one million of workers on temporary contracts lost their jobs in March 2020, as firms preferred not to include them in the schemes. It would have been better if they had done so.

About the person

Marcel Jansen is an associate professor at the Universidad Autonóma de Madrid, a researcher at Fedea, and research fellow at IZA. His main research interests are in the fields of labour economics, economics of education, and macroeconomics. He acted as a consultant for the OECD, the European Commission, the World Bank, and the Inter-American Development Bank.

DOI: 10.48720/IAB.FOO.20230509.02