To actually beat a recession, governments should probably make it harder for companies to get those subsidies that prevent layoffs.
March 25, 2026
Original Paper
Optimal Short-Time Work Policy in Recessions
SSRN · 6460003
The Takeaway
Standard economic practice is to expand eligibility for hours-reduction subsidies during downturns to keep people employed. However, this model reveals that the most efficient policy is to tighten eligibility criteria in recessions to mitigate fiscal waste, as the program's only true purpose is to offset specific tax externalities created by the unemployment insurance system.
From the abstract
Short-time work (STW) is a subsidy program linked to a reduction in working hours that has been widely used across Europe and partly used in some US states to combat job losses in the Great Recession and the COVID-19 pandemic. Although typically used alongside an unemployment insurance (UI) system, the interaction between STW and UI remains conceptually unclear. To close this gap in the literature, I develop a search and matching model of the labor market with risk-averse workers, flexible hours