Short-Time Work and Precautionary Savings

Abstract

During the Covid-19 crisis, most OECD countries used short-time work (subsidised reductions in working hours) to preserve employment. This paper documents that short-time work affects the behaviour of firms (supply) and households (demand). First, using household survey data from Germany, we show that the consumption risk of short-time work is lower than that of unemployment. Second, we construct a New Keynesian model with heterogeneous workers and firms, incomplete asset markets, and labour market frictions. Short-time work weakens workers’ precautionary savings motive and lowers labour costs. This reduces the level and volatility of both the separation and unemployment rate at the cost of tying workers to less productive firms. Quantitatively, the positive employment effects dominate the productivity losses.