pandemic recession from March to April 2020 was a different phenomenon than previous post-World War II recessions: different in cause, duration, depth, and types of social and economic changes that occurred. The corresponding economic policy measures also varied. Instead of The standard anti-crisis policy of stimulating the entire economy, it is more useful to think of a pandemic recession policy as a form of social insurance. One of the key questions is whether this social insurance should be provided primarily by supporting the unemployed or by supporting jobs.
Lest this difference sound like a word game, think about this difference in the real world. Most European countries have responded to the pandemic with “reduced work” programs. The idea that an employer does not need to lay off or lay off workers. Instead, they significantly reduce hours of operation, and the government makes up the difference. It’s a kind of partial unemployment, except that when the worst of the pandemic’s short, sharp blows to the economy were over, workers were still in their old jobs and employers could increase their working hours again. In contrast, the US approach emphasized larger and longer unemployment payments intended for those who were unemployed. US employers (with the exception of some smaller state-level programs) have not been able to switch to short-term work.
Giulia Giupponi, Camille Landais, and Alice Lapeyre discuss the trade-offs between their two approaches in Should We Insure Workers or Jobs in a Recession? (spring 2022, Journal of Economic Perspectives, 36:2, 29-54). Here is one of their figures. The solid lines show the proportion of the population receiving unemployment insurance, the blue line shows the US, and the red line shows the weighted average for Germany, France, Italy and the UK. Note that the proportion of workers receiving unemployment insurance during the pandemic is rising sharply in the US (solid blue line) but barely changing in European countries (solid red line). Conversely, the share of part-time workers rises sharply in European countries (dashed red line) but hardly increases in US budgets (dashed blue line).
The bottom panel of the figure shows the difference in the share of the “unemployed” adult population, which rises sharply in the US, but does not change much in Europe, because short-term workers still have jobs.
Giupponi, Landais, and Lapeyre deal with trade-offs in some detail. I will try to offer a short summary here. The UI approach provided a higher level of assistance to people (indeed, the US response to the pandemic in some cases included UI payments in excess of previous wages). However, the incentives for firms to lay off workers and for workers to become unemployed were much lower in the short-term work system.
The great advantage of the short-term work method is that it preserves the previous job match between employer and employee, which preserves the knowledge and skills contained in the specific relationship between a particular employer and a particular employee, and avoids costs. dismissal and rehiring. On the other hand, given that a pandemic-induced recession (like all recessions) is associated with a reallocation of workers from one sector to another, short-term work tends to discourage this reallocation more than an unemployment insurance approach.
Finally, workers in general benefit from labor market tightness, meaning that there are relatively few vacancies for available workers. In the context of the US,The effects of the pandemic downturn in this regard have been historically unusual: the unemployment rate quickly fell to very low levels, and the US economy was in a situation where the number of vacancies exceeds the number of jobs.. It seems plausible that high U.S. unemployment insurance payments, by encouraging some workers to quit their jobs, have contributed to tighter U.S. labor markets, thereby benefiting other workers.
The authors are also quick to point out that society does not need to make a binary choice between these approaches. For example, it may be that short-term work is best suited to a short-term sharp negative shock that is highly likely to reverse, while unemployment insurance is better suited to a shock that is likely to last longer and be less likely to reverse. It can be imagined that one approach will work better for workers in some industries than in others.
But this choice has another dimension: when an unexpected shock, such as a pandemic recession, occurs and a quick political response is required, what is the government already prepared to do? The administrative-political apparatus of the US government was not designed to use short-term work, even if it were desirable. A group of contributors — David Autor, David, David Cho, Leland D. Crane, Mita Goldar, Byron Lutz, Joshua Montes, William B. Peterman, David Ratner, Daniel Villar, and Ahu Yildirmaz — export this question to “$800 Billion Paycheck Protection Program: Where did the money go and why did it go there? (Spring 2022, Journal of Economic Perspectives, 36:2, p. 55-80).
These authors note that when the pandemic hit in March 2020, bailing out the economy seemed more important than wasting time developing a carefully crafted and targeted program. Moreover, the US government lacked the pre-existing administrative capacity to immediately deploy a short-term work program. So, along with higher unemployment benefits and stimulus checks, the US government passed an $800 billion Paycheck Protection Plan with the idea of providing funds to small businesses. The funds were provided through guaranteed loans from banks: in fact, any firm with up to 500 employees could receive a loan of up to $10 million, which would then be forgiven if the firm kept employment and wages at about the same level for 2 years old – 6 months.
Remember, while some sectors of the economy have been hit hard by the recession caused by the pandemic, others have been hit less or have recovered faster. For these firms, PPPs were essentially free money. Not surprisingly, 94% of eligible firms registered, at a cost to the government of $800 billion. The authors summarize:
The Paycheck Protection Program had a measurable impact. This significantly reduced job losses due to the pandemic, saving 1.98 million to 3.0 million work years of employment during and after the pandemic at a significant cost of $169,000 to $258,000 per work year saved. PPPs have also reduced the number of temporary closures among small firms, although it is less clear whether it has reduced the number of permanent closures. However, most of the PPP loan dollars disbursed in 2020—between 66 percent and 77 percent—did not go to salaries, but were instead awarded to business owners and shareholders. And because business ownership and equity ownership are concentrated among high-income households, extending the program to household income distribution has been highly regressive. We estimate that about three-quarters of PPP benefits go to the top quintile of household income. By comparison, federal unemployment insurance and household stimulus payments were distributed much more evenly.
However, the authors don’t want just PPP with a luxury of hindsight. As they note:
The regressive spread of PPP and its limited effectiveness as an economic stimulus is due to the lack of targeting of the program. This absence, in turn, reflected a need. Given the time pressure, and more importantly, the lack of an existing administrative infrastructure to oversee targeted federal support for the entire U.S. small business population at the start of the pandemic, we strongly suspect that Congress could not have better targeted the Paycheck Protection Program without significantly slowing its delivery. Thus, we agree with Bartik et al. (2021) that policy makers have made a reasonable trade-off between speed and targeting in a PPP design.
Of course, the main lesson here is that if the US is to be able to use short-term work in response to a future recession, the administrative infrastructure must be in place ahead of time. But one of the major disappointments in current policy development is that so little attention seems to be paid to drawing policy lessons from the pandemic – not just on employment issues, but also on regulatory and public health issues – about what institutions, mechanisms, and priorities must be set now, until the moment when they are urgently needed.