Preserving Links in the Pandemic

In a typical recession, there are economic benefits to business closure. While often disruptive and damaging to owners and employees, closure allows for a reallocation of labor and capital resources away from firms that aren’t able to generate profits during the new economic environment. This process ultimately benefits the overall economy, including workers overall. 

The economic crisis triggered by the COVID-19 pandemic was of a different nature than a typical recession. Governments had intentionally restricted activity in significant parts of the economy to reduce the in-person interactions that might spread the virus. As a consequence, businesses that were productive and profitable in February 2020 were in grave danger of bankruptcy just weeks later, in March 2020. 

The threat of business closure, then, did not reflect an inability of at-risk firms to compete in the market or survive a period of depressed aggregate demand. Instead, the threat came from forced reductions in business activity of unknown duration and severe intensity. 

This unique circumstance created the possibility of liquidations. For many businesses, the “black box” of production—consisting of organizational knowledge, robust customer and supplier networks, and, importantly, worker-firm links and the firm-specific human capital held by workers—was at risk of being shattered. These liquidations would have been wasteful because they did not result from market forces or factors. This logic was especially compelling in the spring of 2020, when the lockdowns were expected to be relatively short. 

Recognizing this, governments in advanced economies provided various types of support to aid business continuity and preserve worker-firm links. These programs were often expensive, and some had complex rules. Even seemingly secondary aspects of the design of these programs involved allocating significant amounts of resources and could affect economic outcomes for years to come. 

In this volume, we present preliminary evidence on the efficacy and efficiency of a number of these design choices. We do so through a comparative lens, by studying the different decisions reached by policymakers in eight Organisation of Economic Co-operation and Development (OECD) member states: Australia, Canada, France, Germany, Italy, Spain, the Netherlands, and the United Kingdom.

While policymakers in these countries faced similar trade-offs— between preserving existing ties between firms and workers and facilitating the process of creative destruction that is so central to a dynamic economy and between providing social insurance and incentivizing innovation and adjustment—they responded to them in different ways. 

In the first chapter of the volume, Ian Schmutte of the University of Georgia sets the stage by addressing fundamental questions: When are employer-employee matches valuable? Under which conditions are they worth preserving, and when are they not? After outlining the conceptual considerations at play, Schmutte outlines a number of significant challenges associated with measuring the value of matches empirically. 

He then turns to an overview of the evidence economists have started to collect. Perhaps the most easily measured component of match value is the value of a match to employees: Sudden firm death or downscaling generates quasi-experimental variation that researchers can exploit. Similar efforts are now underway from the firm’s perspective, but it remains difficult to map the value of continuity for an individual firm or worker to society as a whole. 

The latter is crucial if we want to evaluate policies that preserve matches, as preserved matches typically come at the expense of reduced reallocation of workers, jobs, and capital across occupations, firms, and industries. The significant general-equilibrium effects involved are precisely why the comparative lens applied in the later chapters is an essential complement to the microeconomic evidence typically adduced by labor economists.

Existing assessments of the two main labor-market programs in the United States illustrate the limitations of microeconomic evidence. Take research by David Autor et al. and R. Glenn Hubbard and Michael R. Strain, for example, three papers that analyze aspects of the Paycheck Protection Program (PPP). They analyze in detail the effects of funds spent on the PPP on important outcomes and its role in preserving employment at firms that were at the margin of eligibility for PPP funds. While this evidence is valuable, it is entirely unclear what it tells us about a counterfactual world where the US implemented a wage-subsidy scheme, as did Australia and Canada, or relied much more heavily on short-time work, as France and Germany did. Or consider research from Harry J. Holzer, Hubbard, and Strain, who study the employment effects of the early expirations of additional pandemic-era unemployment benefits in certain states.3 How does one compare those additional benefits to the kind of restrictions on layoffs implemented by Italy or Spain? 

Comparing how different countries fared is a first step toward understanding the pros and cons of such large policy differences, differences that are difficult to observe in one country, even one as large and decentralized as the United States. 

This volume seeks to provide precisely this. In this way, the chapters in this volume—and the volume as a whole—will help economists understand better the microeconomic evaluations of country-specific programs by placing them in a comparative context. It will also allow policymakers to understand various options should a situation similar to the spring of 2020 arise again.

Summary of Country-Specific Chapters

Jeff Borland of the University of Melbourne and Jennifer Hunt of Rutgers University study Australia’s JobKeeper program. This program, which was rolled out in response to the pandemic, provided a wage subsidy to employers with significant revenue losses. As we will see in other cases, a key idea behind the wage subsidy was to make it attractive for both workers and firms to preserve employment ties instead of relying on unemployment benefits. Borland and Hunt argue that while the program preserved employment ties early in the pandemic, it did not help the recovery much: Firms relied more on new hires than on reactivating incumbent workers.

Miles Corak of the City University of New York’s Graduate Center also studies a wage-subsidy program, the Canada Emergency Wage Subsidy. His assessment is perhaps even more negative: He highlights policymakers’ triple failure “to (1) address the factors that influence a firm’s decision to shut down, (2) recognize that the legal incidence of a subsidy is not necessarily its economic incidence, and (3) target policy at the margin.” And yet, he is ultimately not sure whether better alternatives were feasible at the time: As in the American case, program design was severely hampered by the feasibility of program delivery.

France used a different type of labor market policy. The London School of Economics and Political Science’s Xavier Jaravel analyzes the short-time work scheme introduced in France in response to the pandemic. He draws a clear distinction between micro- and macroeconomic effects of the program. At the micro level, he claims, the key trade-off is between reaching firms and individuals in need versus inefficiently supporting “zombie firms” and matches that are not valuable. On the macro level, he argues that the program raised consumer confidence while reducing uncertainty for businesses. While that helped produce a swift recovery, it produced a perhaps overly tight labor market and created a risk of large numbers of delayed bankruptcies.

While France’s short-time work program was a central component of its crisis response, Germany is probably the country most closely associated with this kind of policy. Tom Krebs of the University of Mannheim studies Germany’s use of this policy in response to the COVID-19 crisis as it unfolded there. He comes to three main findings. First, the short-time work program prevented a large increase in unemployment. Second, he argues that the program probably did not slow the pace of recovery by reducing hours per employee. And third, he is optimistic that the program—by not disrupting the process of worker reallocation too much while preserving (firm-specific) human capital—set the stage for faster postcrisis productivity growth than we would have witnessed otherwise.

The chapter on Italy, by Russell Cooper of the European University Institute and Immo Schott of the University of Montreal, analyzes a short-time work scheme as well, but one that was introduced in conjunction with firing restrictions. This drastic measure was in place throughout most of the second quarter of 2020 and remained in place in select industries afterward. The authors find that the restrictions on firing were particularly crucial in explaining developments in the Italian labor market. While employment was reduced during the first two quarters of 2020—due to job losses among the self-employed and temp workers—the unemployment rate actually went down. But it is not all good news: Based on simulation, Cooper and Schott argue that the Italian government’s intervention had a detrimental impact on productivity by making it difficult for the most productive firms to find workers.

The next chapter, by Roel Beetsma of the University of Amsterdam and Raymond Gradus of Vrije Universiteit Amsterdam, provides an overview of the COVID-19 economic policy response in the Netherlands. More than previous chapters, it emphasizes the consequences policymaking during the crisis will have for the future. The authors highlight three challenges in particular. First, the crisis response significantly increased the government’s role in the economy, including through outright equity stakes in some industries. Second, as hinted at in a number of previous chapters, processes of dynamic reallocation were disrupted by some of the measures taken. And finally, the dramatic scale of the interventions has exacerbated existing budgetary challenges by contributing to debt levels and creating expectations of future largesse.

Juan F. Jimeno of the Bank of Spain analyzes a program similar in spirit to the short-time work programs we have seen so far. Unlike some short-time work programs, the Spanish job-retention scheme allowed for temporary layoffs and, during the crisis, incorporated financial incentives for employers to reactivate workers.

To provide the reader with context, Jimeno emphasizes that the Spanish labor market has a dual structure: Three-quarters of workers have permanent contracts with high levels of employment protection, while the rest are employed on a temporary basis. Unsurprisingly, the overwhelming majority of new hires (and layoffs) during a given period fall into the latter category. While Jimeno believes it is too early for a comprehensive assessment, he expresses concern that a generously funded job-retention scheme in this context would mostly protect relatively low-value matches. An ominous sign on that front is the limited training that appears to have taken place for workers on reduced or zero hours.

The labor market policy response in the United Kingdom emphasized temporary layoffs, or furloughs, even more strongly. As Jonathan Cribb and Paul Johnson of the Institute for Fiscal Studies explain in their contribution, at its peak the furlough scheme supported the incomes of 30 percent of UK employees. While the furlough program allowed for short-time work after the initial COVID-19 wave, it was overwhelmingly used for full-fledged temporary layoffs. As in the other countries studied, the unemployment rate did not escalate—certainly not to the extent one might expect based on the reduction in economic activity. Based on that fact, the relatively high reactivation rate of furloughed workers, and the income smoothing facilitated by the program, Cribb and Johnson deliver a positive assessment of the furlough scheme.

The central concern of the volume’s concluding chapter, by Ricardo Reis of the London School of Economics and Political Science, is how interventions exacerbated existing budgetary challenges. He takes us back to the United States for a detailed look at the implications of the crisis for fiscal sustainability. He provides a brief sketch of the past few decades of increasing public debt in the United States and other advanced economics before analyzing why the federal government accumulated and was capable of accumulating so much additional debt during the pandemic response. Reis concludes his chapter and the book with a sobering look at the limits on continued accumulation of debt by the US federal government.

Conclusion 

Were these programs successful? Even in a microeconomic sense, that question is hard to answer because policymakers were often “building the car while driving it”—adapting and modifying the program as the pandemic and associated social-distancing restrictions changed. In many cases, programs that were designed to offer a bridge of a few months ended up lasting many times that length. 

These programs also had more goals than is typically the case. Determining eligibility was difficult in the fog-of-war atmosphere of the spring of 2020. And, unusually, these programs were racing against the clock, attempting to get money to recipients rapidly. Hubbard and Strain make this argument with respect to the PPP: 

PPP is a novel program, and many standard intuitions about fiscal policy do not apply to it. It was not a stimulus program in the sense that its purpose was not to stimulate the economy; that is, it is not a program calling for a measure of the multiplier. Instead, its purpose was to preserve the productive capacity of the small business sector and to shorten the transition to a new, post-pandemic equilibrium by supporting labor demand over the medium term, allowing for a more rapid economic recovery. It was not a jobs program in the sense that its goal was not exclusively to preserve employment. Instead, its goals were to maintain worker-firm attachments, particularly during the shutdown, and to ensure small business continuity. It intentionally did not attempt to exclude inframarginal recipients because the unique circumstances under which it was enacted made this impractical. In the early days of the shutdown, how could the government have known which firms were inframarginal? And given the numerous goals of the program, it’s not clear how marginal would be defined in this context.

Were these programs successful? The various authors in this volume have different perspectives on this answer. We hope that reading their chapters—and taking the volume as a whole—will inform your answer to this question.

Chapter One – The Value of Job Matches

• Ian M. Schmutte provides a general overview of the value of employer-employee matches and the challenges associated with measuring their value.

Chapter Two – Did the Australian JobKeeper Program Save Jobs by Subsidizing Temporary Layoffs?

• Jeff Borland of the University of Melbourne and Jennifer Hunt of Rutgers University study Australia’s JobKeeper program, which provided a wage subsidy to employers with significant revenue losses. 
• A key idea behind the wage subsidy was to make it attractive for both workers and firms to preserve employment ties instead of relying on unemployment benefits. 
• Borland and Hunt argue that while the program preserved employment ties early in the pandemic, it did not help the recovery much: Firms relied more on new hires than on reactivating incumbent workers.

Chapter Three – The Canada Emergency Wage Subsidy as an Employer-Based Response to the Pandemic: First Steps, Missteps, and Next Steps 

• Miles Corak studies the Canada Emergency Wage Subsidy, and comes to a dismal assessment.
• He highlights policymakers’ triple failure to (1) address the factors that influence a firm’s decision to shut down, (2) recognize that the legal incidence of a subsidy is not necessarily its economic incidence, and (3) target policy at the margin.
•  He is ultimately not sure whether better alternatives were feasible at the time: As program design was severely hampered by the feasibility of program delivery.

Chapter Four – Whatever It Takes: Subsidizing Short-Time Work During the COVID-19 Pandemic in France 

• Xavier Jaravel analyzes the short-time work scheme introduced in France
• At the micro level, he claims the key trade-off is between reaching firms and individuals in need versus inefficiently supporting “zombie firms” and matches that are not valuable. 
• On the macro level, he argues that the program raised consumer confidence while reducing uncertainty for businesses. While that helped produce a swift recovery, it produced a perhaps overly tight labor market and created a risk of large numbers of delayed bankruptcies.

Chapter Five – German Labor Market Policy During and After the COVID-19 Recession 

• Tom Krebs studies Germany’s use of a short-term work program. He comes to three main findings:
• First, the short-time work program prevented a large increase in unemployment. 
• Second, he argues that the program probably did not slow the pace of recovery by reducing hours per employee. 
• Third, he is optimistic that the program set the stage for faster post-crisis productivity growth than we would have witnessed otherwise.

Chapter Six – COVID-19: The Italian Job 

• Russell Cooper and Immo Schott analyze a short-time work scheme in Italy that was introduced in conjunction with firing restrictions. 
• The authors find that the restrictions on firing were particularly crucial in explaining developments in the Italian labor market. 
• While employment was reduced during the first two quarters of 2020— due to job losses among the self-employed and temp workers—the unemployment rate actually went down. 
• Cooper and Schott argue that the Italian government’s intervention had a detrimental impact on productivity by making it difficult for the most productive firms to find workers.

Chapter Seven – The Dutch Experience with Job-Preserving Policy During the Coronavirus Pandemic 

• Roel Beetsma and Raymond Gradus provide an overview of the COVID-19 economic policy response in the Netherlands.
• It emphasizes the consequences policymaking during the crisis will have for the future. The authors highlight three challenges in particular. 
• First, the crisis response significantly increased the government’s role in the economy, including throughoutright equity stakes in some industries. 
• Second, as hinted at in a number of previous chapters, processes of dynamic reallocation were disrupted by some of the measures taken. 
• Third, the dramatic scale of the interventions has exacerbated existing budgetary challenges, by contributing to debt levels and creating expectations of future largesse.

Chapter Eight – Labor Hoarding and Employment Protection During the COVID-19 Crisis in a Dual Labor Market: Spain 

• Juan F. Jimeno analyzes the short-term work program implemented in Spain. 
• Unlike some shorttime work programs, the Spanish job-retention scheme allowed for temporary layoffs and, during the crisis, incorporated financial incentives for employers to reactivate workers. 
• Jimeno emphasizes that the Spanish labor market has a dual structure: ¾ of workers have permanent contracts with high levels of employment protection, while the rest are employed on a temporary basis. The overwhelming majority of new hires (and layoffs) fall into the latter category.
• Jimeno expresses concern that a generously funded job-retention scheme in this context would mostly protect relatively low-value matches. An ominous sign on that front is the limited training that appears to have taken place for workers on reduced or zero hours.

Chapter Nine – Policies to Preserve Worker-Firm Links During the Pandemic: Lessons from the UK’s Coronavirus Job Retention Scheme

• Jonathan Cribb and Paul Johnson analyze the United Kingdom’s policy response that emphasized temporary layoffs, or furloughs.
• At its peak, the furlough scheme supported the incomes of 30% of UK employees. While the furlough program allowed for short-time work after the initial COVID-19 wave, it was overwhelmingly used for full-fledged temporary layoffs. 
• The unemployment rate did not escalate. Based on that fact, the relatively high reactivation rate of furloughed workers, and the income smoothing facilitated by the program, Cribb and Johnson deliver a positive assessment of the furlough scheme.

Chapter Ten – How Was the US Government Able to Borrow So Much During the COVID-19 Pandemic?

• Ricardo Reis takes us back to the United States for a detailed look at the implications of the crisis for fiscal sustainability. 
• He provides a brief sketch of the increasing public debt in the US and other advanced economics before analyzing why the federal government accumulated and was capable of accumulating so much additional debt during the pandemic response. 
• Reis concludes his chapter and the book with a sobering look at the limits on continued accumulation of debt by the US federal government.

Roel Beetsma is professor of macroeconomics and dean of the faculty of economics and business at the University of Amsterdam and visiting professor at the Copenhagen Business School. He is also a member of the European Fiscal Board, the Centre for Economic Policy Research, and CESifo (Munich). He sits on the supervisory boards of a pension fund and a wealth management company. He has been a consultant for the European Central Bank, the European Commission, and the International Monetary Fund. His scientific work focuses on budgetary policy and pension economics. His research has been published in many academic journals, such as the American Economic Review, the Journal of Economic Literature, and the Economic Journal.

Jeff Borland is Truby Williams Professor of Economics at the University of Melbourne. He received a PhD from Yale University and a bachelor’s degree (honors in economics and history) from the University of Melbourne. His main research interests are the operation of the Australian labor market and program and policy design and evaluation.

Russell Cooper is professor of economics at the European University Institute. He received a PhD from the University of Pennsylvania in 1982 and has held positions at Yale University, the University of Iowa, Boston University, the University of Texas at Austin, and the Pennsylvania State University. Cooper is a National Bureau of Economic Research faculty research associate and a fellow of the Econometric Society.

Miles Corak is a professor of economics with the Department of Economics and the Stone Center on Socio-Economic Inequality at the Graduate Center of the City University of New York.

Jonathan Cribb is an associate director at the Institute for Fiscal Studies. His research focuses on the impacts of government policies on labor markets and retirement savings. He received a PhD in economics from University College London.

Raymond Gradus is professor of public economics and administration at the School of Business and Economics at the Vrije Universiteit Amsterdam. He is also a fellow of Tinbergen Institute and chairman of the Committees for Financial Supervision of the Dutch Antilles. He was affiliated with the Dutch Ministries of Finance and Economic Affairs, and he served as the director of finance at the Dutch Ministry of Social Affairs and Employment. His research interests are public administration, local government, environmental policy, and social security. He has published in many academic journals, such as International Public Management Journal, Public Administration, Ecological Economics, and Oxford Economic Papers.

Jennifer Hunt is a professor of economics at Rutgers University. Previously, she held positions at McGill University, the University of Montreal, and Yale University and in the US Departments of Labor and Treasury. She received a PhD from Harvard University and a bachelor’s degree from the Massachusetts Institute of Technology.

Xavier Jaravel is associate professor of economics at the London School of Economics and Political Science. He holds a PhD from Harvard University. His research studies inclusive growth, innovation, international trade, and inequality; his work has also generated important insights in applied econometrics, including event studies and shift-share designs. His research has led to international recognition, including the 2021 Award for the best French economist under 40. In the RePEc/IDEAS ranking for top young economists, he is ranked 10th worldwide. In 2021–22, he was chief economist at the Inspection Générale des Finances at the French Finance Ministry.

Juan F. Jimeno is an adviser at the Bank of Spain, a professor at the University of Alcalá, and a research associate at CEMFI, the Center for Economic and Policy Research, and the Institute of Labor Economics. He holds a PhD in economics from the Massachusetts Institute of Technology.

Paul Johnson is director of the Institute for Fiscal Studies and a visiting professor in the department of economics at University College London. Previously he has worked at Her Majesty’s Treasury, the Department for Education, and the Financial Services Authority. Between 2004 and 2007, he was deputy head of the UK’s Government Economic Service.

Tom Krebs is a professor of economics at the University of Mannheim, the academic director at the Forum New Economy, and a member of the German Minimum Wage Commission. He has been a visiting professor at the German Ministry of Finance and an economic consultant to the International Monetary Fund, World Bank, and Federal Reserve Bank of Minneapolis.

Ricardo Reis is the A. W. Phillips Professor of Economics at the London School of Economics. He received the 2021 Jahnsson Award for best economist in Europe under the age of 45, was elected to the Econometric Society in 2019, and received the 2016 Bernacer Prize. He is an academic consultant to the Federal Reserve Bank of Richmond, the Riksbank, and the Bank of England. He received a PhD from Harvard University.

Ian M. Schmutte is an associate professor in the department of economics at the University of Georgia and a fellow of the Global Labor Organization and the Labor Dynamics Institute. He has worked with the US Census Bureau’s Longitudinal Employer-Household Dynamics and Center for Enterprise Dissemination programs. His research in labor economics covers a wide set of topics, with a focus on how regulations and social institutions affect earnings and job mobility. Schmutte also studies data privacy, focusing on methods to protect respondent confidentiality while maintaining accuracy in official statistics.

Immo Schott is associate professor of economics at the University of Montreal. He received a PhD from the European University Institute.