Essays on Labor Market Policy

Abstract

Optimal Short-Time Work Policy in Recessions: <br/> Short-time work (STW) is a subsidy program linked to hours reduction that has been widely used around Europe 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 choice, endogenous separations, and generalized Nash-Bargaining. Deriving closed-form expressions, I demonstrate that while the UI system provides income insurance to workers, the STW system mitigates the fiscal externality of UI-induced separations. Notably, STW only exists due to the UI system. Reflecting European practices, I allow the STW system to adjust over the business cycle while keeping the UI system constant. In line with the actual policy, my findings indicate that STW benefits have to increase in recessions, while in contrast to the actual use of STW, eligibility criteria have to be tightened. Interestingly, using UI with an optimal STW system is fiscally less expensive than the UI system on its own. <br/> <br/> Optimal STW Policy and Labor Misallocation: <br/> Short-time work (STW), a subsidy program linked to hours reduction, emerged as the central labor market instrument to combat unemployment in several European economies. As the scope of the instrument expanded, concerns arose about its impact on labor misallocation. To investigate this concern, I develop a search and matching model of the labor market, incorporating optimal STW policy. Information asymmetry hinders the government to discern between temporary unproductive firms, characterized by a high chance of recovery, and permanent unproductive firms, marked by a low chance of recovery. I show that the Ramsey planner wants to support temporary unproductive firms with high subsidies per period to prevent inefficient separations and permanent unproductive firms with low subsidies per period to foster the reallocation of workers. Optimal STW benefits need to trade-off the costs from excess worker retention in permanently unproductive firms against the costs of premature separations in temporary unproductive firms. Quantitative analysis shows that an optimally designed STW system can eliminate a substantial share of the costs associated with labor misallocation. If the government can observe firms’ separation intentions, it can improve outcomes by letting benefits decline over time to encourage reallocation from permanently unproductive firms. If not, a minimum hours reduction condition as eligibility criterium can serve as an effective screening tool for shock duration, rendering a declining schedule unnecessary. <br/> <br/> Carrots or Sticks? Short-Time Work vs. Lay-off Taxes: <br/> While unemployment insurance systems are widely used to insure workers against income losses after lay-offs, it is well known that they can inefficiently increase separations in the labor market. There are two common policy instruments that can counter this known problem: lay-off taxes and short-time work schemes. This study provides a search-and-matching framework to evaluate which of the two is the better policy tool. We show that if only a few firms are financially constrained, lay-off taxes are better because they do not distort working hours in the economy. With a large share of financially constrained firms, short-time work emerges as the superior tool, as lay-off taxes have trouble deterring separations in financially constrained firms. Additionally, short-time work can help provide insurance against income losses to risk-averse workers that constrained firms cannot afford to provide in their wage contracts. Calibrating the model to the U.S economy, we find that short-time work is the superior policy instrument if 40% of firms in the economy or more are financially constrained.