Preparing ERTE for the Future

Executive summary

The Spanish job retention scheme, Expedientes de Regulación Temporal de Empleo (ERTE), played a major role in preventing job losses and supporting employment during the COVID‑19 crisis. Thanks to the unprecedented and widespread use of job retention support, the increase in unemployment in response to the decline in economic activity was several times smaller during the COVID‑19 crisis than during the global financial crisis when unemployment surged and the use of ERTE was negligeable. The positive impact of ERTE on employment is confirmed by an in-depth evaluation based on the use of comprehensive administrative data and an innovative strategy to identify causal effects.

ERTE has become a model for best practice

Job retention support in Spain has been transformed from a little used and difficult to access scheme before the COVID‑19 crisis to a scheme that can be scaled up quickly in response to a major economic downturn and be phased out easily as economic conditions recover.

The labour market reform of December 2021 consolidated many of the important changes that made job retention support so successful during the COVID‑19 crisis. It also introduced a specific mechanism designed for scaling up support in the case of large adverse shocks. This is referred to as the “RED Mechanism”.

The RED mechanism can be activated by the government in the case of either 1) macroeconomic cyclical downturns, or 2) sectoral transformations that require substantial labour reallocation. Once activated, firms can apply for support under a simplified procedure while benefiting from favourable conditions for support.

As a result of the labour market reform of December 2021, Spain is now one of the few OECD countries with an explicit framework for scaling up job retention support in times of exceptional need.

The use of ERTE was mainly driven by health and economic conditions

In response to the COVID‑19 crisis, job retention support was provided in a timely manner, reaching almost 25% of the workforce by April 2020, only one month after the outbreak of the pandemic. The timeliness of support is likely to have played a crucial role in explaining its effectiveness.

As economic restrictions were withdrawn and economic activity resumed, the demand for job retention support declined. This was reinforced by successive adjustments to ERTE that gradually increased its costs for firms. As a result, the use of ERTE declined to negligible levels by early 2022. The fact that take‑up did not persist in the recovery is reassuring. It suggests that ERTE did not significantly slow the reallocation of jobs from low-productivity firms with structural difficulties to high-productivity ones with healthy growth prospects.

The use of ERTE was stronger in regions, industries and occupations most affected by the COVID‑19 crisis, providing further evidence that support was effectively targeted to firms and workers that needed it most. Take‑up was particularly important among small services firms and occupations that involve face‑to-face contact or where the scope for teleworking was limited.

ERTE was highly effective in supporting employment

In order to evaluate the effectiveness of ERTE in supporting employment during the COVID‑19 crisis, this report provides quasi‑experimental evidence based on the difference in co-financing rules for hours not worked between firms with slightly less than 50 employees and those with 50 or slightly more employees.

The results indicate that ERTE was highly effective in preserving jobs. Lower co-financing requirements for firms with slightly less than 50 employees increased take‑up rate by 4.5 percentage points on average during the period from March 2020 to August 2021, while it increased the job retention rate by 3.3 percentage points. Taken together, these estimates imply that deadweight effects – support for jobs that would have been retained anyway or could not have been saved even with support – were modest, amounting to about 25% of its total costs.

The effects of ERTE on employment are even larger when taking account of its role in preventing congestion effects that arise when many jobseekers are competing for a limited number of vacancies during an economic downturn. As a result, the effect of ERTE on aggregate employment exceeds take‑up. This implies that the fiscal balance of job retention support was positive, i.e. the cost of supporting jobs was more than offset by lower expenditures on unemployment benefits and higher tax receipts.

Considerations for the future

While ERTE has been a major success and the 2021 labour market reform already introduced important changes to further enhance the effectiveness of ERTE in supporting labour market resilience, the report provides a number of considerations that could help to further fine‑tune the design of ERTE in the future.

Recommendation 1 – Keep the system simple and predictable.

While applying for job retention has been relatively straightforward since at least the start of the COVID‑19 crisis, the design of the scheme remains relatively complex and has changed numerous times. This reduces the readability of the scheme by firms and workers and the effectiveness of having a well-designed scheme. While the labour market reform of December 2021 represents a major step in making the system more predictable, there remain some aspects of the scheme that could be simplified further.

Recommendation 2 – Promote the effectiveness of training while on short-time work.

Training while on short-time work is already actively promoted through the use of financial incentives in the form of additional exemptions from social security contributions. However, more could be done to enhance its effectiveness. For example, one could require work-related training to be provided externally by certified external suppliers. Similarly, one could monitor the effectiveness of training courses through the use of regular evaluations.

Recommendation 3 – Replace co-financing with experience‑rated employer contributions.

Spain actively uses co-financing requirements for firms to enhance the targeting of support to firms with temporary difficulties. A potential problem with co-financing, however, is that it not only reduces support to firms with structural difficulties but also those with temporary ones facing liquidity constraints. To address this issue, Spain could consider replacing direct co-financing by experience‑rating, where future social security contributions are based on the use of ERTE in the recent past.

Recommendation 4 – Ensure out-of-work income support is available for workers for whom job retention support is not effective.

While the use of ERTE during the COVID‑19 crisis has been a major success, it cannot be a solution to all problems during a deep economic downturn. It is important therefore to ensure that workers for whom ERTE is not available or tends to be less effective, such as the self-employed, temporary workers and workers in firms with structural difficulties, have access to effective out-of-work income support.