The Effectiveness of Job-Retention Schemes: COVID-19 Evidence From the German States

IMF Working Papers, October 1, 2021

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Canonical URL: The Effectiveness of Job-Retention Schemes: COVID-19 Evidence From the German States

Authors: Shekhar Aiyar, Mai Dao
Date: October 1, 2021
Core focus: Quantifying the impact of Kurzarbeit (KA), Germany’s short-time work program, on unemployment and domestic demand during the COVID-19 recession by exploiting state-level variation in pandemic exposure and KA take-up.

Constructed a shift-share measure of the labor demand shock.
Instrumented KA take-up using the pre-existing, state-specific share of workers eligible for KA.
Analysis leverages state-level variation to identify effects of KA expansion during the COVID-19 recession.
Provides preliminary evidence on the sensitivity of medium-run resource reallocation to the prevalence of job-retention schemes during the Global Financial Crisis.

KA was crucial in mitigating unemployment:
- Absent its expansion the unemployment rate would have increased by an additional 3 pp on average at the trough of the recession.
KA bolstered domestic demand:
- The contraction in consumption could have been 2 to 3 times larger absent the program.
Preliminary medium-run evidence:
- The study presents preliminary evidence that the medium-run reallocation of resources is sensitive to the prevalence of job-retention schemes during the Global Financial Crisis.

Job-retention schemes like Kurzarbeit can play a central role in:
- Limiting increases in unemployment during large negative demand shocks.
- Supporting domestic demand by preventing larger consumption contractions.
The prevalence of such schemes may influence medium-run patterns of resource reallocation following major economic shocks.

The Effectiveness of Job-Retention Schemes: COVID-19 Evidence From the German States, Shekhar Aiyar and Mai Dao, October 1, 2021.