The pandemic recession from March to April 2020 was a different creature from the previous post World-War II recessions: different in cause, length, depth, and the kinds of social and economic changes that happened. The appropriate economic policy response was also different. Instead of the standard anti-recession policy of stimulating the entire economy, it is more useful to think of pandemic recession policy as a form of social insurance. One key question is whether this social insurance should operated primarily by supporting the unemployed or by supporting jobs.

Lest this distinction sound like a word game, consider this real world difference. In the pandemic, most European countries responded with programs of “short-time work.” The idea the employer doesn’t need to fire or lay-off workers. Instead, it cuts their hours substantially, and the government makes up the difference. It’s a kind of partial unemployment, except that when the worst of short, sharp pandemic hit to the economy passed by, the workers were still employed at their previous jobs and employers could ramp up their hours again. In contrast, the US approach emphasized larger and longer unemployment payment aimed at those who were without jobs. US employers (with the exception of some small state-level programs) did not have option of switching to short-time work.

Giulia Giupponi, Camille Landais, and Alice Lapeyre discuss the tradeoffs between tehse two approaches in “Should We Insure Workers or Jobs during Recessions?” (Spring 2022, Journal of Economic Perspectives, 36:2, 29-54). Here’s one of their figures. The solid lines show the share of population receiving unemployment insurance, with the blue line showing the US and the red line showing a weighted average for Germany, France, Italy, and the United Kingdom. Notice that the share of workers getting unemployment insurance in the pandemic spikes up in the US (solid blue line) but barely budges in the European countries (solid red line). Conversely, the share of workers on short-time work spikes up in the European countries (dashed red line) but barely budgets in the US (dashed blue line).

The bottom panel of the figure shows the different in the share of the “nonemployed” adult population, which spikes in the US, but doesn’t move much in the European economies–because short-time workers still have jobs.

Giupponi, Landais, and Lapeyre work through the tradeoffs in some detail. I’ll try to offer a quick summary here. The unemployment-insurance-based approach provided a higher level of assistance to people (indeed, the US response to the pandemic in some cases involved unemployment insurance payments that were higher than previous wages). However, the incentive for firms to lay off workers and for workers to become unemployed was much lower in the short-time work system.

The great benefit of the short-time work approach is that it preserves the previous job match between employer and employee, which preserves the knowledge and job skills that are contained in the particular relationship between a certain employer and a certain worker, and also avoids costs of firing and re-hiring. On the other side, given that the pandemic recession (like all recessions) involves a reallocation of workers from one sector to another, short-time work tends to inhibit this reallocation more than an unemployment-insurance-based approach.

Finally, workers in general benefit from “tightness” in the labor market, meaning that there are a relatively small number of job openings for the available workers. In a US context, the aftermath of the pandemic recession has been historically unusual in this way, with unemployment rates having rapidly fallen back to very low levels and the US economy in a situation where job openings exceed jobs. It seems plausible that the high US unemployment insurance payments, by encouraging some workers to leave their jobs, have contributed to these tight US labor markets–thus benefiting other workers.

The authors are also quick to point out that a society need not make a binary choice between these approaches. For example, it might be that short-time work is best for a short, sharp negative shock that has a high probability of reversing itself, while unemployment insurance is better for a shock that seems likely to last longer and less likely to reverse itself. One can imagine that one approach would work better for workers in some industries than for others.

But there is another dimension to this choice: When an unexpected shock like a pandemic recession hits and a rapid policy response is needed, what is the government already geared up to do? The administrative policy apparatus of the US government was not set up to use short-time work, even if it had been desirable to do so. A group of coauthors–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 in “The $800 Billion Paycheck Protection Program: Where Did the Money Go and Why Did It Go There?” (Spring 2022, Journal of Economic Perspectives, 36:2, pp. 55-80).

These authors point out that when the pandemic hit in March 2020, getting financial assistance out there to the economy seemed more important than taking the time to set up a carefully designed and targeted program. Moreover, the US government lacked the pre-existing administrative capacity to ramp up an immediate program of short-time work. Thus, along with the higher unemployment benefit and the stimulus checks, the US government enacted the $800 billion Paycheck Protection Plan, with the idea of providing funds to smaller-sized businesses. The funds were provided by guaranteeing loans from banks: in effect, any firm with up to 500 employees could get a loan of up to $10 million, which would then be forgiven if the firm kept employment and wages at roughly the same levels for 2-6 months.

Remember, while some economic sectors were hit very hard by the pandemic recession, others were hit less hard or recovered more quickly. For those firms, the PPP was essentially free money. Unsurprisingly, 94% of the eligible firms signed up at a cost to the government of $800 billion. The authors summarize:

The Paycheck Protection Program had measurable impacts. It meaningfully blunted pandemic job losses, preserving somewhere between 1.98 and 3.0 million job-years of employment during and after the pandemic at a substantial cost of $169,000 to $258,000 per job-year saved. PPP also reduced the rate of temporary closures among small firms, though it is less clear whether it reduced permanent closures. The majority of PPP loan dollars issued in 2020—66 to 77 percent—did not go to paychecks, however, but instead accrued to business owners and shareholders. And because business ownership and share-holding are concentrated among high-income households, the incidence of the program across the household income distribution was highly regressive. We estimate that about three-quarters of PPP benefits accrued to the top quintile of household income. By comparison, the incidence of federal pandemic unemployment insurance and household stimulus payments was far more equally distributed.

However, the authors are reluctant to just the PPP with the luxury of hindsight. As they point out:

The PPP’s regressive distributional incidence and its limited efficacy as economic stimulus stem from the program’s absence of targeting. This absence, in turn, reflected necessity. Given the time constraints and, more profoundly, the lack of existing administrative infrastructure for overseeing targeted federal support to the entire population of US small businesses at the onset of the pandemic, we strongly suspect that Congress could not have better targeted the Paycheck Protection Program without substantially slowing its delivery. We thus concur with Bartik et al. (2021) that policymakers made a defensible trade-off between speed and targeting in the PPP’s design.

Of course, the underlying lesson here is that if the US wants to have the option of using short-time work in response to a future recession, the administrative infrastructure needs to be set up in advance. But one of the major frustrations of current policy-making is that there seems to be so little focus on learning policy lessons from the pandemic–not just concerning issues of employment, but also across issues of regulation and public health–about what institutions, arrangements, and priorities need to be set up now, before the moment when they are urgently needed.