Nearly 100,000 workers were let go from the tech industry in the U.S. in 2022 as the sector saw a sharp reversal in fortunes. These redundancies were a result of a general downturn after a prolonged bull run. Often, however, companies are forced to lay people off in response to a very particular crisis. Research from Bocconi University explores whether such layoffs were necessary or whether things like short-time work programs could help firms retain workers.
The study looks at how governments can support organizations during crises to ensure that workers are retained. The authors argue that implementing short-time work programs can allow firms to reduce the number of hours employees work while continuing to pay them a full-time wage.
Retaining workers
Not only are firms that participate in these programs more likely to retain workers in the long term but they’re also more likely to survive themselves, even if such participation also provides short-term impediments to efficient labor market allocation.
The use of short-time work programs is commonly deployed by governments in a bid to prevent mass layoffs. They involve subsidizing employment to encourage employers to retain workers even as their hours are reduced. The furlough schemes utilized during the Covid pandemic are a very recent example of them in action.
The researchers examined the impact of such programs during the Great Recession in Italy. They analyzed administrative data on both companies and workers and were able to capitalize on the fact the eligibility for the programs varied across the country to understand its impact on productivity, employment, and welfare.
Positive impact
The results show that while employment decreased across the board during the recession, those companies that were able to participate in the program ended up with 45% more employment than those that were not. This is largely due to their ability to retain workers on reduced hours, thus reducing their wage bill temporarily, with the government subsidies ensuring that workers didn’t lose out.
Enrollment into the program was especially high among firms facing liquidity issues and who had a high risk of mass redundancies, which clearly shows that the programs were reaching their intended audience. The researchers estimate that the programs increased the likelihood that firms would survive by around 10%.
“The key result of the paper is that short time work works. It helps saving employment in firms that use the program and offers a substantial degree of short-term insurance to workers against the cost of hour reductions and job loss,” they explain.
Short-term boost
The impact was relatively short-lived, however, as in the medium and long run, workers who participated in STW programs fared only marginally better in terms of employment outcomes than those laid off before the crisis.
“There is a risk that—when the shock is permanent—short-time work might end up subsidizing low-productivity jobs,” the researchers explain.
In other words, low-productivity firms were most likely to use the program, and they had little chance of growing once the program ends, so there is a risk that it encourages zombie firms to stagger on and prevents workers from moving to higher-productivity firms.
The study suggests that areas with higher STW utilization experienced slower employment growth and total factor productivity growth, even though these effects are of modest size. As a result, they conclude that while STW programs can be highly effective at mitigating the worst impacts of temporary crises, they certainly shouldn’t be used to deal with permanent shocks as they interfere with the reallocation of workers to other employers.
To guarantee that the program’s benefits are maximized, the authors propose to introduce mechanisms—such as a co-payment by firms—to attract into the program those who are willing to bear part of the cost.
“This is one way by which we can improve the selection of firms and reduce the likelihood of these potential reallocation effects,” the authors conclude.
