Welfare Effects of Short-Time Compensation

Time: 2011, Tuesday November 8, 13.00-14.00 hours
Location: CPB-office, Van Stolkweg 14, The Hague

Presentation: Bjoern Bruegemann (Yale University - VU)
Co-author paper: Helge Braun,  University of Cologne

Discussant: Rob Euwals

Language: English

Registration:  Please register by sending an email to seminars@cpb.nl.

Abstract subject: In addition to unemployment insurance (UI), most OECD countries operate short-time compensation (STC) systems which partially compensate workers for a loss of income due to a reduction in hours. In several countries the utilization of STC experienced a large increase during the Great Recession of 2008-2009, which has led to a renewed interest in this type of labor market policy. This paper studies the welfare effects of UI and STC in a model of implicit contracts. Full insurance through employers is prevented because firms have only limited funds, leaving a welfare improving role for UI and potentially STC. The model is used to answer three qualitative questions concerning the joint design of UI and STC. First, for a given level of UI, does introducing a small amount of STC necessarily improve welfare? Second, starting from the optimal UI system without STC, does introducing STC with the same replacement rate as UI necessarily improve welfare? Third, if a reform replaces the optimal UI system without STC with the optimal system combining UI and STC, does this necessarily reduce layos? We find that the answer is negative for all three questions.

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