Job retention schemes in perspective: lessons learnt and insights for future policy
Job retention schemes in the past, present and future
The importance of job retention schemes has increased over time in the EU, peaking during the pandemic, and they remain a vital tool for tackling potential future downturns. This section presents the purpose of these schemes, their different types and design dimensions; it then briefly illustrates their history and the main changes in their design in the EU. Finally, it shows that a few Member States have increased their reliance on job retention schemes, amid the current surge in restructuring needs in the wake of new economic shocks and against the background of the green and digital transitions.
Job retention schemes aim to preserve employment during temporary economic disruptions
Job retention schemes are policy measures designed to help employers retain their employees during periods of temporary economic disruption. They are mainly used in case of external events that negatively affect business activity (technical accidents, bad weather conditions, other causes of force majeure) and in case of transitory business downturns (e.g. substantial reduction in turnover or orders, expected to be temporary). In some Member States, they are also used in case of company restructuring. These schemes subsidise wages or provide financial support to maintain the employer-employee relationship and to prevent layoffs.
During temporary economic crises, retaining employment relationships may be advantageous for both workers and firms . When it comes to immediate costs, firms can find it expensive to lay off a worker due to firing costs, and the worker may not wish to quit and suffer a loss of income and – in case of a longer unemployment spell – potentially also a deterioration of skills and work habits. Due to search frictions in the labour market, it may take time for the worker to find another good job that matches his or her skills and experiences. For the firm, finding a suitable replacement once the economic conditions improve is also time and cost intensive. The firm may, furthermore, wish to retain the firm- or job-specific human capital that the worker has acquired. This can be especially relevant for firms faced with significant labour and skills shortages. Specific human capital can also limit workers’ external job opportunities, making continued employment relationships with the company more appealing. Finally, for the firm, preserving employment allows a faster re- scaling of activities once the temporary shock subsides.
These schemes have the potential to also benefit the economy as a whole. They can increase the probability of firms surviving temporary downturns. They allow the burden of adjustment to be shared more equally across employees, compared to a situation when some transit into unemployment. From a macroeconomic point of view, they reduce the volatility of employment and incomes. Depending on their coverage of sectors and types of employment contracts, the schemes can mitigate the impacts of a crisis on inequalities. By preserving employment relationships, they can promote a faster recovery, fostering the resilience of the labour market. They alleviate the financial burden on unemployment benefit systems (albeit the net fiscal effect also depends on the costs of job retention schemes and their take-up). Moreover, by preventing a rise in long-term unemployment, they minimise negative social impacts. However, the actual impacts of the schemes depend on their design and the patterns of their use.
There are three main types of job retention schemes, characterised by slightly different aims and features. They are short-time work schemes, partial unemployment schemes and wage subsidy schemes (see Box 3.1). Short-time work schemes subsidise reduced working hours while keeping workers employed. Partial unemployment schemes are similar to short-time work schemes in terms of their outcomes, but they are organised differently: workers whose working hours are reduced are registered as partially unemployed and receive a partial unemployment benefit for the hours not worked. Furlough schemes can be seen as an extreme case of partial unemployment schemes; they provide subsidies when the number of hours worked is reduced to zero. Wage subsidies provide financial support for hours effectively worked, maintaining full employment and stable pay.
Box 3.1: Types of job retention schemes and main features of their design
Short-timeworkschemes allow firmstotemporarily reduce the working hours of their employees, who in turn receive public support for the hours not worked. Public support for workers is channelled through firms, and it is companies that have to meet the eligibility conditions. These schemes can be financed through general taxation (e.g. Luxembourg), through the social security budget (e.g. Austria, Germany and Portugal) or a combination of both (e.g. France). In some Member States, national short-time work schemes are set up as an insurance mechanism, financed through contributions of participating companies (e.g. Italy). To prevent misuse, companies may be required to partially contribute to the financing of the subsidy. They either contribute directly to the fund for short-time work, or are expected to co-finance the public support (by paying part of the indemnity to the worker, or by paying full or reduced social security contributions). The co-financing can be capped, reduced or waived, depending on the type of the crisis. Employees typically also bear some of the adjustment costs by receiving lower pay for hours not worked. Therefore, overall, the state, companies and workers share the costs of short- time work schemes. This arrangement spreads the costs of adjustment more equally across the workforce, instead of leading to job loss for certain groups of workers. Moreover, since the work reduction is assumed to be temporary, the workers concerned are not considered as ‘jobseekers’ and are not required to search for alternative employment opportunities.
Partial unemployment schemes, including furlough schemes, can be regarded as functionally equivalent to short-time work schemes, with one major difference. The employment contracts of workers on partial unemployment are maintained, but social security contributions are not paid for the hours not worked. The eligibility conditions for the receipt of the public subsidy apply to the individual worker, rather than the enterprise. Workers are subject to the same eligibility criteria that apply to the standard (‘full’) unemployment benefits, they can claim the (partial) unemployment insurance benefit only if they have the necessary contribution record. The main difference with short-time work schemes is that workers can seek alternative employment opportunities, meaning that they are expected to look for and accept possible offers for full-time jobs (Adăscăliței et al., 2024; Corti et al., 2023; Drahokoupil and Muller, 2021) and they are eligible for training and job search assistance.
Third, wage subsidies offer financial support to companies in difficulty regardless of the reduction in hours worked. Their aim is to preserve employment through subsidising companies’ wage bills, similarly to short-time work schemes. However, in contrast with the other two types of schemes, wage subsidies can be provided irrespective of a possible reduction in working hours, and workers’ wages are not decreased (Drahokoupil and Muller, 2021). Social insurance contributions remain due. These schemes are typically financed from the state budget and used to provide support at short notice given that they can be deployed relatively swiftly (Drahokoupil and Muller, 2021).
Job retention schemes can be designed with the following dimensions in mind:
- Activation conditions (criteria related to the economic difficulties covered, role of social partners)
- Eligibility criteria or coverage (sectors, types of firms and types of employment contracts covered)
- Target of support (workers’ income or employer wage cost)
- Generosity (size of the wage replacement, or, in the case of wage subsidies, size of support relative to the total wage costs of the employer; co-financing requirements)
- Extent of working time reduction (ranging from potentially zero in the case of wage subsidies, to potentially 100% in the case of furlough schemes)
- Conditions for the receipt of the subsidy (maintaining employment relationships, participation in training)
- Duration of the support
The design of job retention schemes influences their take-up and broader economic impact. Activation conditions need to balance the need for a swift response to economic shocks and the need to target the subsidy to firms in need. Social partners can play a role in aligning the interests of employers and employees amid a shock and avoid the misuse of funding. While a higher generosity of support increases take-up by reducing costs for firms and employees, it can also increase the likelihood of inefficiencies associated with the use of support. Section 3.3 will analyse in-depth the main economic considerations on the design of job retention schemes and the main trade-offs involved, based on economic theory and recent empirical evidence.
The use of job retention schemes in the EU increased over the past decades
Before the financial crisis of 2008, 11 Member States had job retention schemes in place to mitigate the impact of recessions. Germany established its first ‘Kurzarbeit’ scheme in 1910 , while Italy introduced its ‘Cassa Integrazione Guadagni Ordinaria’ in 1947. In France, a scheme was legislated in 1951 and Austria introduced it in 1968 . This was followed by the introduction of job retention schemes in Belgium, Denmark, Finland, Ireland, Luxembourg, Portugal, and Spain by the beginning of the 2008 financial crisis.
In some of these Member States, job retention schemes were employed also in case of restructuring. In Italy, the ‘Cassa Integrazione Guadagni Straordinaria’ (set up in 1968) is a type of short-time work schemes that was created to help large companies in manufacturing, construction, and services, that were affected by significant company crises and reorganisations. In Luxembourg, the ‘Chômage partiel pour difficultés économiques structurelles’ is a short-time work scheme that can be activated in case of companies’ structural problems. In both countries, the request for support has to be accompanied by a restructuring plan . In Germany, the ‘Transferkurzarbeitergeld’ (introduced in 1989) is a form of short time-work scheme that supports workers’ transitions during companies’ restructuring and insolvency .
During the 2008 financial crisis, both new and existing job retention schemes mitigated the impact of the recession on employment in Member States. Bulgaria, Czechia, Hungary, Poland, Slovakia and Slovenia put in place for the first time temporary job retention schemes during the Great Recession, while the Netherlands implemented a permanent partial unemployment scheme . Furthermore, among the Member States that already had introduced them, Germany, Italy, and France expanded their coverage to include also fixed-term and temporary contracts on top of permanent ones , while other non-standard workers and self-employed remained excluded. Only Austria and Luxembourg forbade workers’ dismissal during the duration of the scheme. In addition, schemes’ durations were extended in some countries (Austria, Italy, Germany, and Portugal), and the replacement wage was increased in others (Belgium and France) . Evidence shows that these schemes have effectively preserved jobs , especially in countries with high take-up rates, for instance, in Germany they are estimated to have saved between 300,000 and 400,000 jobs in 2009 .
During the pandemic, all Member States relied on job retention schemes, introducing new schemes or modifying the design of existing ones . 17 countries had a short-time work scheme or a partial unemployment scheme in place before the pandemic and eight Member States introduced a new scheme. In addition, four Member States started to use different types of schemes (i.e. partial unemployment or furlough schemes, short-time work schemes, and wage subsidies), simultaneously or in sequence. Overall, short-time work schemes were the most employed type (19 countries), followed by furlough schemes (ten countries), and wage subsidies (eight countries); some countries had different types of schemes operating in parallel.
During the pandemic, Member States simplified access to short-time work schemes, broadened their coverage and increased their generosity. Administrative procedures to access support have been simplified. The coverage of the schemes has been increased in the majority of Member States, to ensure the eligibility of all sectors, types of firms, and employment contracts potentially affected by the crisis. This typically included a broadened coverage, to include workers on fixed-term contracts, temporary agency and non-standard workers. Countries with partial unemployment benefit schemes (e.g. Belgium, Spain, Finland) relaxed the eligibility conditions for workers to receive benefits. The costs to be borne by employers have been typically reduced, while the wage replacement rates for employees have been increased. In view of the uncertainty of the crisis, the duration of support has been extended. Most Member States have introduced protection against dismissal as a condition of support from job retention schemes.
Job retention schemes, supported by SURE, experienced high uptake and proved effective in cushioning the labour market impact of the pandemic.
They helped to preserve jobs and skills, as well as to foster economic resilience and a rapid recovery . Furthermore, they helped to protect future pension entitlements through continued social security contributions . Financing from the SURE instrument contributed to this outcome. A total of EUR 98.4 billion of SURE financial assistance was disbursed to 19 Member States. Approximately 31.5 million people and 2.5 million firms are estimated to have been covered by SURE in 2020. 9 million people and over 900,000 firms were covered by SURE in 2021 in 15 Member States, with a clear phasing out in 2022 when 350,000 people and 40,000 firms were covered in 4 Member States. According to its final evaluation , job retention schemes, including those financed through SURE, are conservatively estimated to have saved between 1.03 million and 1.66 million jobs in 2020 alone in SURE beneficiary Member States . The availability of SURE financing enabled Member States to support additional employment-related measures and more ambitious measures. In other words, in the absence of SURE, the deployment of national measures would have been less ambitious. Limited layoffs also prevented a disproportionate burden on the social protection and welfare systems . Looking at the whole EU, estimates indicate that job retention schemes saved the equivalent of 13.3% and 1.1% of employment in the EU in 2020 and 2021, respectively . The extensive use of job retention schemes in the EU, compared to higher reliance on unemployment benefits in the US, led to significant differences in terms of unemployment and hours worked in the short-term, but these differences converged in the medium term .
After the pandemic, several EU Member States have kept job retention schemes in place as a policy tool that can be adjusted to address different types of crises. For instance, France and Romania extended these schemes specifically to help businesses manage the economic disruption caused by the war in Ukraine, particularly its impact on supply chains . By spring 2024, 13 Member States had permanent short-time work schemes in place, accessible to companies that meet specific eligibility criteria. In addition to the 11 countries with long-standing systems, the Czech Republic and Slovakia established permanent short-time work schemes during the pandemic, integrating them into their labour market frameworks after this crisis .
Job retention schemes have been increasingly used amid recent economic developments, but design matters
Recently, there have been signs of a labour market slowdown in the EU, with slowing employment growth and job losses concentrated in specific countries and sectors due to restructuring. Since the first quarter of 2023, employment growth and hiring intentions have started to decrease in parallel with an increase in planned job reductions due to restructuring (see Chapter 1). In 2024, in more than half of EU Member States companies’ restructuring led to negative net job growth, particularly in manufacturing, where internal restructuring was the main driver. Germany recorded the highest net job losses (-92,025), especially in manufacturing (83.2% of the job losses occurred in this sector) due to restructuring, followed by Sweden and the Netherlands, with losses concentrated in manufacturing and retail respectively. Across the EU, manufacturing, financial services, and retail sectors have been most affected. Internal restructuring alone accounted for nearly 60% of all job losses in the EU, reflecting mounting pressures on companies to adapt to structural and economic changes (see Chapter 1).
In this context, some EU countries have increased their reliance on job retention schemes in 2024 to protect employment. Germany has seen a sharp rise in short-time work use, with 268,000 employees covered in September 2024, up by 76% from the previous year, particularly in manufacturing. Italy also reported significant increases in hours authorised under its ordinary short- time work scheme. For instance, Slovenia is working to establish a permanent short-time work scheme, in which the support, during part-time work, will be linked to training and skill development for workers affected by increasing digitalisation and automation of business processes .
The experiences of Germany and Italy with the use of short-time work for restructuring underline the crucial role of ALMPs for the re-employment of redundant workers. In Germany, ‘Transferkurzarbeit’ allows workers to be laid off during restructuring to enter a ‘transfer company’ with a fixed term employment contract, and to receive short-time work support along with training and job search assistance. Fackler, Stegmaier and Upward (2023) show that employees with more limited labour market options choose to enter this scheme, which boosts their chances to be re- employed within five years, by five percentage points. This impact can be attributed mainly to the active components of the scheme. In Italy, the ‘Cassa integrazione guadagni straordinaria’ (CIGS) provides short-time work support to firms in a prolonged crisis or with restructuring needs. Giupponi and Landais (2023) demonstrate that, although CIGS helped to maintain employment and wages during the provision of the subsidy in the pre-pandemic period, these positive effects did not persist after firms ceased to receive support. Subsequent reforms incorporated ALMP components (training, support for personalised job search and a wage subsidy to boost re-employment) into the scheme. However, evaluations to assess the impact of these additional tools are not available yet. Other major changes to the design of this scheme included phasing out support to firms in insolvency and reducing the fragmentation of a system with many different types of subsidies.
Overall, job retention schemes can preserve employment and offer short-run income support, but they need to be accompanied with active components to promote employment transitions amid restructuring. Job retention schemes can delay the displacement of at-risk workers, and provide them with income support above the level of unemployment benefits. This can be especially valuable in periods of high unemployment when outside options are scarce for laid off workers and for workers who have low chances of re-employment in general. Firms may have incentives to co-finance this, during a period when it is unclear how restructuring will affect their employment, or when the alternative costs of laying off workers would be too high. However, such income support can be expensive, can be seen as not equitable (as it is not available to people who are already unemployed), and is in itself not effective to promote employment in the medium term. The evaluation findings highlighted above and also the broader economic literature confirm that chances of re-employment can be more effectively promoted by the use of active labour market policy measures than by job retention schemes alone.
The Commission recommendation on Effective Active Support to Employment (EASE) remains relevant for public policies to accompany restructuring. In 2021, this recommendation provided policy suggestions for promoting transitions in the labour market in response to structural change. It called on Member States to develop coherent packages of strengthened active labour market policies, consisting of three elements: i) employment (hiring and transition) incentives; ii) upskilling and reskilling opportunities linked to labour market needs; and iii) enhanced support by employment services. It invited policy efforts to focus on groups that are in a vulnerable position or underrepresented in the labour market. These suggestions remain applicable in the current economic environment of slowing employment growth and intensifying restructuring.