Selection into short-time work and the program’s employment and windfall effects: Evidence from Germany

I study the ramifications of the German short-time work (STW) scheme Kurzarbeit , which subsidizes hours not worked. Using novel administrative data on STW and drawing on linked evidence from establishment surveys, I investigate the selection into STW and the scheme’s employment and deadweight effects. During the pandemic, I document a strong negative selection into STW based on measures of firm quality and productivity, a pattern not observed during the financial crisis. This selection pattern is explained by the differing types of crises and their impact on establishments. Adjusting for selection, I then investigate the employment effects of STW in the pandemic and find 3%–4% higher employment levels for firms utilizing STW. This relationship, however, vanishes quickly after firms exit STW, a result driven by outflows among STW firms being initially lower, but being higher after the end of STW. I provide suggestive back-of-the-envelope evidence that windfall effects, or deadweight losses, were substantial during the pandemic. While approximate calculations suggest that half a million job-years were saved by STW in 2020, millions of jobs were supported in total.