ZEW Economist Sebastian Siegloch on the Short-Time Work Allowance and the Risk of Deadweight Effects

Germany’s “Grand Coalition” has agreed to extend the period for which the short-time work allowance can be claimed: Due to the coronavirus crisis, workers will be able to receive the allowance until the end of December 2021, which represents a 24-month extension. Professor Sebastian Siegloch, head of the ZEW Research Department “Social Policy and Redistribution”, comments on this matter:

“The instrument of the short-time work allowance should only be used temporarily in times of crisis to ensure employment, stabilise incomes and bring the economy back on track as quickly as possible once the crisis is over. Against this background, the short-time work scheme has proven to be an effective tool to combat the current crisis: Recent research findings show that the short-time work allowance has been successful in reaching those companies that were particularly hard hit by the crisis. This instrument was also of great help during the financial crisis.

Nevertheless, it is a mistake to expand the short-time work scheme to this extent at this point in time. There is the risk of keeping companies artificially alive, which had already been uncompetitive before the coronavirus crisis broke out, a phenomenon came to be described by the unfortunate term ‘zombie companies’.

These efficiency losses are normal, and they can be tolerated, as long as the positive effects of the measure outweigh the negative ones. It always comes down to the trade-off between costs and benefits. And that is precisely the problem in this current decision. At this point in time, there is no way of knowing how the benefits will relate to the costs of the short-time work allowance in the coming year. Still, we are laying down the conditions today. This extension comes much earlier than would have been necessary, and the extension period is excessive. However, the same argument holds for those who are highly critical of the extension: Bringing the short-time work scheme to a definite stop in March 2021 is just as unreasonable.

We must continue to move with caution in this crisis and explain our actions to the public. If we see signs of recovery at the beginning of the year, we will have to roll back these expensive government measures like the short-time work allowance. We owe this to the future generations. Should we still be in the middle of the crisis at the beginning of the year, it seems to be appropriate to extend the period of the short-time work scheme beyond March. In case of an economic recovery however, we will need to adjust the amount of the allowance and re-examine whether the allowance is reaching the sectors that are most affected.”