The Welfare Implications of Job Retention Schemes

This paper examines the welfare implications of job retention schemes, where governments subsidize employers to preserve jobs during downturns. Using EU microdata from 2003 to 2018, we show that such schemes are associated with lower job separation rates, especially among lower-productivity workers. We build a search-and-matching model with occupational choice, calibrated to the United Kingdom during the global financial and sovereign debt crises. Simulations show that a retention policy scheme aimed at reducing unemployment by nearly 1 percentage point would have been both welfare-enhancing and cost-effective. Average welfare would have increased by 0.06 percent in consumption-equivalent terms, with low-income workers benefiting more than twice as much as the median worker by avoiding costly job switches and unemployment spells.