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Welfare Effects of Short-Time Compensation

Helge Braun and Björn Brügemann
University of Cologne, Working Paper Series in Economics No. 77, 2014

Keywords: Short-Time Compensation, Unemployment Insurance, Welfare

We study welfare effects of public short-time compensation (STC) in a model in which firms respond to idiosyncratic profitability shocks by adjusting employment and hours per worker. Introducing STC substantially improves welfare by mitigating distortions caused by public UI, but only if firms have access to private insurance. Otherwise firms respond to low profitability by combining layoffs with long hours for remaining workers, rather than by taking up STC. Optimal STC is substantially less generous than UI even when firms have access to private insurance, and equally generous STC is worse than not offering STC at all.

Welfare Effects of Short-Time Compensation