The Unassuming Economist

From a new VOXEU post:

“Figure 1 shows the evolution of various worker outcomes – the employment probability, the number of hours worked, and total earnings and transfers – around the time of STW treatment and compares workers who receive STW treatment (in blue) with two groups of similar workers who do not receive treatment. The workers in the grey square series are of particular interest – they are workers, similar to our treated group, but in firms who cannot access STW programmes, and who are laid-off. The figure shows that two years after STW treatment, there are no significant differences in the employment probability, earnings, and total income of workers who were treated by STW and workers who were laid-off. In other words, STW does not seem to provide any significant insurance to workers in the medium or long run.

How can we explain the very temporary nature of the impact of STW? The first answer lies in the selection of firms into these programmes. In the Italian context, firms that were at the bottom of the productivity distribution before the recession are three times more likely than higher-productivity firms to take up STW during the recession and employment effects for them are significantly smaller. These results are confirmed in the French context by Cahuc et al. (2018). This clearly suggests that STW predominantly targets firms that have permanently lower productivity and helps explain why keeping workers in these firms does not entail significant long-term benefits. More importantly, it suggests that, by preventing workers from moving from low- to high-productivity firms during recessions, STW may have significant negative reallocation effects in the labour market. Leveraging the rich spatial variation available in Italy across more than 600 local labour markets, we can estimate how an increase in the fraction of workers treated by STW in a local labour market affects employment outcomes of non-treated firms. Our results provide evidence of the presence of equilibrium effects of STW within labour markets. STW significantly decreases the employment growth and inflow rates of non-treated firms, and has a significant (although small) negative impact on TFP growth in the labour market.

Another reason that may explain the absence of long-term employment effects of STW in the Italian context is the nature of the Italian recession, which was long and protracted. It is likely that when a shock is more temporary, the effects of STW will be larger and will last longer, as the desire for labour hoarding is much greater for temporary shocks, especially when the cost of replacing or training workers is high.”