Knowledge Note

The rise in unemployment during an economic crisis poses a significant concern to policy makers. Moreover, layoffs could slow down the economic recovery, since re-hiring and training workers may be costly for firms. This is particularly true for workers who have acquired job-specific skills. For these workers, it may be beneficial for firms to not let them go in the first place. However, as firms face lower demand for their products, they may not have the financial means to keep paying these workers, particularly in the presence of credit constraints, which are often exacerbated during a crisis. There could thus be a case for government intervention through wage subsidies, which could limit layoffs and speed up the recovery by eliminating search and training costs. In fact, 22 countries around the world used some form of wage subsidy program to promote employment retention during the recent crisis.