Labor Reallocation Effects of Furlough Schemes: Evidence from Two Recessions in Spain

Abstract

This paper analyzes the role of furlough schemes when aggregate risk has a sector-specific component. In particular, our focus lies on the different responses of the Spanish labor market to the Great Recession and the recent pandemic crisis since both downturns have been driven by such a type of shocks. However, the pandemic episode involves much less job destruction than the previous recession, following firms’ widespread use of furlough schemes (ERTEs, by their Spanish acronym) which were hardly used before. A favorable effect of these policies is that they stabilize unemployment rates by allowing workers to remain matched with their employers in the most affected sectors. However, under their current design, it is argued that ERTEs crowd out labor hoarding exerted by employers in the absence of those schemes, as well as increase the volatility of working rates and output. In particular, we show, both theoretically and empirically, that ERTEs slow down worker reallocation away from declining sectors to other sectors not affected by those shocks.