Counteracting Unemployment in Crises: Non-Linear Effects of Short-Time Work Policy*

Abstract

Short-time work (STW) is a labor-market policy that subsidizes working-time reductions among firms in financial difficulty to prevent lay-offs. Many OECD countries have used this policy in the Great Recession. In this paper, we show that the effects of STW are strongly time-dependent and non-linear over the business cycle. Discretionary STW policy might save up to 0.87 jobs per short-time worker in deep economic crises. In expansions, the effects are smaller and might turn negative. We disentangle discretionary STW from automatic stabilization in German data using smooth-transition vector autoregressions.