European Economics European Economic Perspectives - Europe: Short-time work – how costly can it get?

We show that one week of lockdown in the Eurozone countries costs between 0.15% and 0.25% of GDP in short-time benefits. In the UK, the weekly cost is around £2.2bn (0.1% of GDP) for self-employed and £3.8bn (0.2% of GDP) for the rest.

31 Mar 2020

Cost of one week of lockdown

Source : Haver, UBS estimates

Short-time schemes: Working less, but staying employed

Short-time work schemes play a key role in Europe's fiscal response to COVID-19. The aim is to prevent unemployment from rising, and the principle is simple: Workers reduce their working time and the lost income is (partly) refunded by the labour office. In the extreme, working hours can be reduced by 100% (equal to a temporary layoff), with the labour office effectively paying workers' wages. The benefits are: companies save wage costs (helping liquidity and solvency), and workers maintain at least part of their income and keep their jobs. Many schemes were tried and tested in the 2008/09 crisis. Usage could be much higher this time around, but by how much? And how costly will this get for the public purse? We address key questions in Q&A format.

Short-time work during 2008/09

Short-time work was used substantially in the great financial crisis. In 2009, around 3% of German and Italian employees were on short-time work schemes, and around 1% in France and Spain. The average reduction in hours was around 25% in Germany and France. There were large differences across sectors: on average, almost 9% of workers in manufacturing worked fewer hours, but the share in services was less than 1%. The fiscal costs were small, amounting to only 0.2% of GDP in the German case.

Will the number of short-time workers surge? And what are the budget costs?

The situation today is different from 2009 in that the services sector is substantially affected by the lockdown, and with services accounting for over 70% of employment (up to 80% in France and the UK), usage of short-time work may surge. We estimate, based on a sector-by-sector analysis, that on average 25% of all employees could be on short-time work during the lockdown (around 80% of which in the services sector). The average reduction in working time could be 46%. Assuming a 9-week lockdown (as we do for our GDP forecast base-case scenario), the fiscal costs in Eurozone countries would amount to c1.5% of GDP – well above 2009 but still manageable. Every week of lockdown adds c0.17% of GDP in short-time work costs.

UK introduces very generous compensation schemes

Unlike in most Eurozone countries, the UK did not have a short-time work scheme prior to COVID-19. In response to the crisis, the government has designed two new schemes to assist employees and self-employed. With around 6.7m employees and 3.8m self-employed likely to use the schemes, we estimate that the total cost could amount to between 1.5% and 2.4% of GDP. We also estimate that each week in lockdown could cost close to £6bn (c0.3% of GDP), making the UK compensation scheme one of the most generous compared with the large Eurozone countries.

High, but temporary budget costs

Costs associated with short-time work schemes may be higher than currently assumed in fiscal packages (up to 0.4% of GDP in the cases of Germany and France) and boost 2020 budget deficits. However, these costs are temporary if workers return after the lockdown, and could reduce longer-term spending on unemployment benefits if joblessness does not increase.

What to watch?

A key data point will be the German March unemployment report for indications about the expected number of short-time workers. The highest number ever reached was 1.44m in May 2009,

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