2021 Reports

The Long-Run Effects of Short-Time Compensation

Kato, Takao; Kodama, Naomi

In light of the Covid-19 pandemic and its ensuing economic crisis, there is renewed interest in worksharing facilitated by Short-Time Compensation (STC) as a potentially effective policy response. Much of the literature concerns the effect of STC in the short run, and little is known about its consequence for employment in the long run. Theoretically on the one hand, when STC is available, the firm may choose to take STC and delay painful yet necessary downsizing/restructuring, resulting in inefficient resource allocation, further weakened competitiveness and even greater job losses in the end. On the other hand, with STC, the firm can preserve valuable firm-specific human capital, leading to greater sales, productivity, and employment growth than without STC. There are also some behavioral advantages of worksharing via STC over layoffs---reducing adverse workplace morale effect of layoffs and enhancing goal alignment and teamwork of workers through shared adversity. Using unique firm-level data on the use of STC by Japanese firms in response to the global Great Recession along with a rich set of firm-level controls, we estimate the Average Treatment effect on the Treated (ATT) of STC in the long run. Our ATT estimation yields the first rigorous econometric evidence on the positive consequence of STC for employment. The size of the ATT is neither trivial nor implausibly large---in four years following the incidence of STC, on average, the firm’s employment level (excluding contingent workers and counting only standard employees) will be 5.1 percentage points higher with STC than without STC. We also find a positive and significant lasting ATT of STC on sales, TFP, and value added, while we find no evidence for the negative ATT on profitability in the long run. Our evidence favors a more sanguine view of the consequences of STC in the context of the economic recovery from the global Great Recession in Japan.