employee hours might have retained staff even in the absence of the STW scheme. The same might be true of a firm employing highly skilled staff that are expensive to re-hire.
The evidence for firms’ response to STW schemes is mixed.[3] At the macroeconomic level, STW schemes appear to have helped avoid layoffs by increasing flexibility in the number of hours worked (Abraham and Houseman, 1994; Arpaia et al., 2010). From a microeconomic perspective, the effect of STW schemes is more difficult to demonstrate, not least because firms that have other ways of adjusting their payroll are less likely to adopt STW schemes (see Lydon et al., 2019 for evidence). For example, Kruppe and Scholz (2014) find that German firms participating in STW schemes during the 2007-2009 crisis reduced their headcount by about the same amount as those not participating. Against this background, we discuss the benefit of STW schemes for two scenarios representing firms at the opposite ends of the spectrum.
For firms that participate in the STW scheme but would have retained and paid in full their employees even in the absence of the scheme, the benefit is equal to the scheme’s transfers. A rough estimate of these transfers is the share of wages replaced by the STW schemes. This varies by country. For most, it is around 50% to 80% of the wages that employees lose because their working hours are reduced (Mueller and Schulten, 2020). The transfer is also reflected in institutional sector accounts. The drop in employee compensation raised entrepreneurial income growth in the second quarter of 2020 even more than during the financial crisis in 2009 (Figure D.2).
Figure D.2
Falling employee compensation added to entrepreneurial income
Source: Eurostat and EIB staff calculations.
For firms that would have laid off staff without the scheme, the benefit is about equal to the frictional costs of firing existing employees and hiring replacements once demand picks up again. Assume that if the firm had laid off staff, its salary payment would have fallen by the same amount that it receives in transfers when participating in the STW scheme and retaining its staff. In that case, participation in the scheme only saves the costs associated with firing and re-hiring employees. These costs, however, can be substantial. Estimates come in at about half of a worker’s annual salary, with significant variations across jobs and countries. Firing costs are typically in the range of one to five months of salary for OECD countries, depending on job tenure and the circumstances of dismissal (OECD, 2020b). Hiring costs, for recruitment and training, greatly depend on the position to be filled. Muehlemann et al. (2016) find that hiring costs are about two months’ salary for skilled German workers, while Blatter et al. (2012) estimate the costs at about three to four months’ salary for skilled Swiss workers, ranging from about one month for a medical assistant to six months for an automation technician. The bulk of these costs are associated with training (see also Manning, 2011, for an overview).
Aside from these direct effects, STW schemes are likely to generate indirect benefits for firms by stimulating aggregate demand. Like other schemes that insure against a sudden decline in income, STW schemes transfer funds to cash-constrained firms and households, whose marginal propensity to spend is likely to be higher than that of those funding the transfers. As a result, aggregate demand is likely to fall less than without the scheme.
Relative to the 2008-2009 recession, the benefits firms derived from STW schemes in the current crisis increased because the schemes were more generous. As a result, take-up has been much higher during the COVID-19 crisis than the 1% to 3% of employees observed in most EU countries in 2009 (Hijzen and Venn, 2011 and European Network of Public Employment Services, 2020). Indeed, a few countries, such as the United Kingdom, introduced STW schemes only in 2020. The schemes were made more generous for several reasons. First, economic activity collapsed as lockdowns were imposed, leaving firms with no time to prepare. In contrast, the 2007-2008 global financial crisis reached its peak with the insolvency of Lehman Brothers in September 2008 and only gradually started to affect real economic activity over the following six months. Second, uncertainty about the depth of the economic crisis was considerably higher in 2020 (Figure D.3). This greater uncertainty has increased the option value of temporarily supporting firms that might become profitable again after the crisis subsides. Third, in many EU countries the decline in output has been more broadly spread out during the COVID-19 crisis than in 2009, when the service sector fared better than construction and manufacturing (Figure D.4). The risk that STW schemes discourage workers from finding jobs that are more productive in other sectors therefore appeared smaller than in 2009.
Figure D.3
Standard deviations of consensus forecasts of euro area GDP growth in 2009 and 2020
Source: Consensus Economic Forecasts.
Note: Forecasts were made in the month shown and were for the annual GDP growth in 2009 and 2020, respectively.
Over time, the unintended effects of STW schemes may become more apparent. As countries emerged from lockdowns over the summer, participation in STW schemes declined. With the health crisis continuing, however, a number of countries extended their schemes (including Germany, France and the Netherlands). This raises the risk that in some sectors, firms that continue to participate in STW schemes might become unviable because demand for their products has declined permanently. For example, demand for office space and public transport may not fully recover. In addition, the cost of discouraging workers from finding jobs that are more productive may soon increase.
Figure D.4
Euro area GDP declined more sharply during the pandemic than in 2009
Source: ECB data warehouse.
Schemes may therefore need to be recalibrated to contain their unintended effects, and they must continue to reflect the institutional and market environment of the various countries, as well as the unfurling of the health crisis. In general, directing the STW schemes towards the sectors worst hit by government measures and promoting the mobility of workers from subsidised to unsubsidised jobs could help mitigate the schemes’ unintended effects.[4]
Financial developments and policies
Compared to the global financial crisis, the COVID-19 crisis took hold against the backdrop of already ultra-accommodative monetary policies and apparently smaller and very limited fiscal space. However, major steps had been taken to increase the resilience of Europe and its institutions: the creation of the European Systemic Risk Board and the three European Supervisory Authorities,[5] the setup of the Single Supervisory Mechanism and other building-blocks of the banking union, and the establishment of the European Stability Mechanism. Contrary to what might have been expected prior to the crisis, policy support unfolded massively and swiftly. As the eradication of the virus and the return to normal take longer than previously thought, this support may be recalibrated to ensure it can continue while minimising its side-effects.
An unprecedented crisis
The COVID-19 crisis is not a normal recession but a halting of activity triggered to prevent a public health disaster. The policy response has therefore had to be different. The purpose is to limit social distress and avert unnecessary bankruptcies that could hold back the recovery. Monetary and fiscal policies have cushioned the blow, mainly by providing financial assistance to companies and workers.
Figure 14