Job retention schemes in perspective: lessons learnt and insights for future policy
Policy implications and conclusions
Job retention schemes have proven to be an effective policy response to economic crises arising from sudden and unexpected shocks. Government intervention to preserve employment is justified by the legal and financial constraints that affect both firms facing economic difficulties and workers facing the risk of unemployment. The main advantage of these schemes lies in helping firms to avoid the significant costs associated with layoffs, rehiring, and retraining, while also preserving valuable firm-specific human capital acquired by workers. During severe but short-lived downturns (i.e. notably the type that was associated with the COVID-19 pandemic), job retention schemes are often more effective than relying solely on unemployment benefits, as they help prevent mass layoffs and the rise in long-term unemployment that may follow.
Job retention schemes are most effective when deployed swiftly but flexibly, and when they are phased out as economic conditions improve. Key design features include flexibility and adaptability, focusing on the sectors and workers most heavily impacted by the shock. While broader coverage helps reducing the overall unemployment risk, the appropriate targeting of job retention schemes can improve their cost-effectiveness and better support sectors and population groups as the crisis evolves. The involvement of social partners in their activation can help to ensure the adequate targeting of the schemes and ensure the fair sharing of costs between the government, employers, and workers with different types of contracts. Ideally, job retention schemes should be predictable and capable of automatic activation as a crisis hits, potentially available as a permanent framework that can be triggered during downturns. This feature can enhance preparedness and ensure timely support when it is most needed.
During the pandemic, broad job retention schemes boosted participation and preserved jobs, but were also associated with lower productivity in the medium term. The empirical analysis shows that, during the pandemic, broad eligibility for firms and workers, combined with simplified administrative procedures, significantly enhanced participation and supported employment in the medium term. By contrast, some conditionalities, such as mandatory training or dismissal bans, were associated with lower participation rates. Furthermore, the results show that a broad coverage of firms by job retention schemes was associated with lower labour productivity on average two and three years later.
It is important to ensure the efficient use of job retention schemes and prevent their misuse. Beneficiaries may rely excessively on support from job retention schemes, particularly when their eligibility criteria are less stringent or when the level of support provided is very generous without requiring a significant contribution from employers. To address this risk, features such as employer co- financing and experience-rating into the design of these schemes can help to better align incentives by preventing firms from treating the support as a cost-free option, thereby reducing the risk of overuse and moral hazard, particularly in less severe economic downturns.
If used in restructuring cases, job retention schemes can help to protect workers of viable companies, while, for non-viable companies, they should be complemented with active labour market policies. Evidence from the use of short-time work in restructuring cases in Germany and Italy shows that these schemes, combined with restructuring plans and targeted training, can help in protecting workers and their income during restructuring of viable firms that will restart their operations after the restructuring. However, the deployment only of short-time work in cases of restructuring of non-viable firms is not advisable in the medium run, since it would delay labour reallocation, which is necessary for competitiveness and growth. In these cases, job retention schemes should be complemented with active labour market policies, such as training and tailored job search assistance, which are more appropriate to facilitate workers’ transitions to new jobs.