“At the peak of the Covid-19 crisis, short-time work covered one in five jobs across the OECD – ten times more than at the height of the global financial crisis”

Alexander Hijzen, a senior economist at the Organisation for Economic Co-Operation and Development (OECD), gives an overview of the country-specific application of short-time work during the Covid-19 crisis and identifies specific features that can serve as an inspiration for others.

How widespread are job retention schemes within the OECD?

As the Covid-19 crisis gathered momentum, nearly all countries took steps to ensure that job retention schemes provided timely and broad-based support to firms and workers affected by social distancing restrictions. Countries with pre-exiting schemes eased access to them and increased their generosity, while countries without pre-existing schemes introduced temporary ones. This led to record high levels of take-up, covering about one in five jobs on average across the OECD at its peak in April/May 2020. This is ten times more than at the height of the global financial crisis. This not only helped to prevent a surge in unemployment and rising financial hardship among workers and their families, but also played an important role in containing the spread of the virus by allowing workers to stay at home. As the situation evolved and economic activity resumed, the take-up rate declined quickly to less than one percent of employment in April 2022. Today, about half of OECD countries continue to operate a job retention scheme, while most temporary schemes have been phased out.

Short-time work schemes also played an important role in containing the spread of the virus by allowing workers to stay at home. 

Can you give us an overview of the various types of job-retention schemes that are applied in OECD countries?

Although nearly all OECD countries operated some sort of job retention scheme during the initial phase of the Covid-19 crisis, there were important differences in their design.

About half of the countries already had a scheme in place before the outbreak of the pandemic. These countries typically operated short-time work schemes that directly subsidised the hours not worked such as the German ‘Kurzarbeit’ programme. As a result, the level of support was directly proportional to the decline in working time.

In countries that introduced a new temporary scheme in response to the Covid-19 crisis, this often took the form of wage subsidies, which could be used to reduce the costs of the hours worked, but also to top up the earnings of workers on reduced working hours (e.g. the Australian Jobkeeper scheme). The subsidies were targeted at firms that experienced a significant reduction in sales. The subsidy itself took the form of a lump sum in countries such as Australia and New Zealand, whereas it was proportional to the reduction in business activity in the Netherlands, for instance.

A smaller number of countries introduced temporary short-time work schemes at the beginning of the crisis. In contrast to countries with pre-existing schemes, these often came with significant restrictions on the permissible reduction in working time. For example, the new temporary schemes in Denmark, Slovenia and the United Kingdom limited their support to jobs that were completely suspended (furlough schemes), while countries such as Greece and Hungary limited their support to jobs that were for a certain number of working hours suspended to promote a broad sharing of the costs of adjustment across the workforce (work-sharing schemes).

How have the job retention schemes been developing since the Covid-19 crisis began?

The design of job retention schemes has seen a number of developments. First, the need to provide timely support to firms and workers following the outbreak of the pandemic led to the adoption of simplified procedures – often triggered by force-majeure clauses – coupled with automated processes for the application, approval and administration of job retention support. Several countries temporarily lowered the criteria for eligibility or even completely removed them. Most countries also actively used digital technologies for the administration of job retention support. This played a key role in the quick scaling up of support at the start of the crisis. It also helped to render policy more agile by making it easier to differentiate the generosity of support across firms and sectors or adjust it in line with the evolving health and labour market situation.

There appears to be a growing consensus among policy-makers that co-financing by firms for hours not worked is key to modulating the degree of support over the course of a crisis.

Second, there appears to be a growing consensus among policy-makers that co-financing by firms for hours not worked is key to modulating the degree of support over the course of a crisis. The idea behind co-financing is to provide incentives for firms to put jobs on support that are temporarily at risk but remain valuable to them in the medium term. As such, it alleviates concerns that support goes to jobs that have become permanently unviable and thus undermines structural adjustment. Given the presence of widespread restrictions on economic activity at the start of the crisis, this was not much of a concern initially. Consequently, most countries set the cost for reduced working hours to zero for firms. However, as economic activity resumed, these concerns gained in importance and co-financing was introduced.

Most countries allowed workers on temporary contracts to be covered by job retention support. This was not always the case during the global financial crisis.

Third, most countries allowed workers on temporary contracts to be covered by job retention support. This was not always the case during the global financial crisis. However, concerns had been raised that job retention schemes could deepen labour market duality by increasing the gap in employment protection between workers on open-ended and workers on fixed-term contracts. Yet, formal eligibility does not guarantee actual access. Job loss continued to be an important channel of adjustment among workers on fixed-term contracts during the Covid-19 crisis.

What is your assessment of the general effectiveness of the job retention schemes or alternative policies aimed at cushioning employment effects of the crisis?

There is little doubt that the widespread use of job retention schemes has prevented many job losses. The increase in unemployment was small relative to the decline in economic activity in those countries that intensively relied on job retention support. However, important questions about the number of jobs saved and the associated costs remain unanswered. Some of the jobs that were supported are likely to have survived also without support, while others were eventually terminated despite being supported. Apart from increasing the cost of job retention support unduly, the latter also might hamper job reallocation and slow job creation in the recovery.

Some of the jobs that were supported are likely to have survived also without support, while others were eventually terminated despite being supported.

However, there is little indication that job retention support has significantly hampered job creation by locking workers in firms with structural difficulties. Initially, support overwhelmingly went to firms in sectors affected by government-mandated restrictions and thus experiencing temporary difficulties due to the Covid-19 crisis. At the same time, job vacancies were significantly down initially thus limiting the opportunities for job mobility. When the economy started to recover and the potential for lock-in effects became more important, the take-up rate declined quickly to its pre-crisis level. In the past, this was not always the case. Following the global financial crisis, the take-up was allowed to persist for a long time in a number of countries. This seems to have been largely avoided this time.

Where do you see the potential for improvement?

While the overall picture is clearly positive, there are several issues related to the use of job retention schemes that could have been handled better in hindsight. For instance, not all countries were equally prepared for the mass roll-out of job retention support. While most countries managed to scale up support quickly, including those that introduced a new scheme from scratch, some countries, particularly those without any pre-existing scheme, had to improvise more than others, with potentially adverse consequences for cost-effectiveness. To give an example, the decision to choose a wage subsidy rather than a short-time work scheme by countries without pre-existing schemes may have been driven by considerations related to ease of implementation rather than to cost-effectiveness.

There is no longer one single country that represents the best practice. Several countries now have well designed schemes, often with specific features that can serve as an inspiration for others.

Are there examples of ‘best practice’ which may serve as an inspiration for other countries?

In the aftermath of the global financial crisis, the German ‘Kurzarbeit’ scheme was widely considered the golden standard of job retention support. During the global financial crisis, Germany was one of the few countries where the take-up was both economically significant and largely temporary and, as a result, short-time work played an important role in mitigating the social costs of the crisis. Other countries have duly taken notice. The result was that during the Covid-19 crisis many countries were able to scale up job retention support significantly while ensuring that its use did not become endemic. This reflects a certain convergence in the basic design of short-time work schemes across countries. Yet, there are still a lot of differences with respect to their specific features. As a result, there is no longer one single country that represents the best practice. Several countries now have well designed schemes, often with specific features that can serve as an inspiration for others.

Are discretionary policy measures in crisis situations preferable to rules-based approaches?

Most measures taken by governments to scale up the use of job retention support in response to the pandemic were discretionary in nature. This may not be surprising given the exceptional nature of the Covid-19 crisis. Indeed, it is not clear if a rules-based approach would have helped to provide a timelier response. According to a rules-based approach, specific crisis measures are automatically triggered once a certain threshold has been reached, e.g. unemployment. In the context of the Covid-19 crisis, such an approach would have most likely delayed rather than advanced the support. However, rules can still be useful as they make policy more predictable and reduce the risk of political capture. As the crisis evolved, a number of countries used objective thresholds with respect to the health or economic situation to make policy more predictable. Spain has recently put in place a specific mechanism based on a national agreement between the social partners and its validation by the government for the activation of special job retention measures in times of crisis.

As the crisis evolved, a number of countries used objective thresholds with respect to the health or economic situation to make policy more predictable.

How do you assess the practical aspects of operating the job retention schemes such as simplified application and administration, quicker support in crisis situations, or administrative overloads and bottlenecks?

Job retention schemes provided timely support to firms and workers during the crisis. The widespread use of digital technologies for application, approval and payment of job retention support played a crucial role in this regard. In virtually all countries, applications can be made online. In most countries, the approval procedure is largely automated resulting in immediate or quasi-immediate approvals, normally within one or two working days. Payments are usually made at monthly intervals, while significant delays tend to be rare. In a number of countries, payments can even be partly made in advance. The speedy implementation of job retention support helped to prevent the firms from running out of cash and subsequently laying off workers that they would have kept otherwise.

What are, in your view, the special features, strengths and weaknesses of the German short-time work scheme (‘Kurzarbeitergeld’) in comparison with the job retention schemes in other OECD countries?

As mentioned above, the German scheme has long been considered a role model for its ability to support labour market resilience. While its basic features have remained broadly constant over time, some of its parameters tend to be adjusted in times of crisis, including during the pandemic. For example, the requirement for firms to continue paying social security contributions over hours not worked is often – at least partially – waived, while the maximum duration of support tends to get extended. However, it does not have a force-majeure modality that automatically waives specific eligibility requirements once certain conditions are met.

During the pandemic, exceptional crisis measures in Germany were maintained over most of the period with few adjustments along the way.

During the pandemic, exceptional crisis measures in Germany were maintained over most of the period with few adjustments along the way. This stands in sharp contrast to countries such as France and Spain that made numerous adjustments to the scheme and differentiated its generosity across different groups of firms, depending on the extent to which their activities continued to be affected by social distancing measures. This may have helped to enhance the effectiveness of job retention support in these countries. But at the same time that may have come at a considerable cost due to the lack of predictability for firms and the large administrative complexity involved.

There has been some debate in Germany on the possible introduction of a force-majeure modality that would waive the requirement for a justification of economic need.

There has been some debate in Germany on the possible introduction of a force-majeure modality that would waive the requirement for a justification of economic need. Such modality already exists in several countries, for example, Belgium and France. It may help to enhance the timeliness of support and reduce the administrative burden. The new mechanism in Spain could provide an alternative possibility. Spain had a force-majeure modality but has replaced it by the RED Mechanism that offers a simplified procedure and more generous support following a national agreement by the social partners that is validated by the government. The RED Mechanism can be invoked in times of a cyclical downturn or in order to facilitate the restructuring of a specific sector.

Personal details

Alexander Hijzen, Ph.D., is a senior economist at the Directorate for Employment, Labour and Social Affairs of the Organisation for Economic Co-Operation and Development (OECD) and a regular contributor to the OECD Employment Outlook. Since 2012, he is a Research Fellow at the Institute of Labor Economics (IZA). His research interests cover wage-setting and job mobility, globalisation and labour markets and the labour market impact of recessions.

doi: 10.48720/IAB.FOO.20230717.03