Saving Jobs in a Crisis: Why Job Retention Schemes Can Boost Welfare and Recovery

IMF research shows that job retention schemes where governments subsidize firms to keep workers employed during downturns can reduce unemployment, protect low-income workers, and speed up economic recovery. By preventing costly job losses and forced career switches, these policies often cost less than unemployment benefits and deliver lasting welfare gains.

Every major economic crisis forces governments to make a difficult choice. Should they allow companies to lay off workers and rely on unemployment benefits to cushion the blow? Or should they step in earlier and pay firms to keep people on payroll, even when business collapses? During the COVID-19 pandemic, many countries chose the second path, rolling out large job retention schemes. A new study by economists at the International Monetary Fund (IMF) suggests that this approach was not only effective in saving jobs but also improved workers’ well-being and helped public finances recover faster.

Job Loss Hurts More Than We Think

Using data from 12 European countries between 2003 and 2018, the IMF researchers show that losing a job often causes long-lasting damage. Workers who become unemployed see sharp drops in earnings, even after they find new jobs. The losses are especially severe when unemployment forces people to switch occupations, because years of experience and skills are suddenly worth less. By contrast, workers who change jobs while still employed usually earn more over time. The difference is simple: moving by choice is very different from moving under pressure.

The study also finds that low-wage workers are most exposed to job loss, especially during recessions. When the economy contracts, they are far more likely to be laid off than higher-paid workers. This makes downturns not just economically painful, but deeply unequal.

How Job Retention Schemes Make a Difference

The picture changes in countries that spend more on job retention policies, such as wage subsidies, short-time work programs, or partial unemployment benefits. In these countries, job losses during recessions are noticeably lower. The protection is strongest for low-wage workers, who otherwise face the highest risk of unemployment. While the study does not claim these policies directly cause fewer layoffs, the pattern is strong enough to raise an important question: could keeping people attached to their jobs reduce the long-term damage of recessions?

To answer that, the IMF economists built a model that mirrors real labor markets. Workers have different skills, firms face sudden drops in productivity, and wages do not adjust instantly. In this setting, job retention schemes act like a bridge. Governments temporarily help firms cover wages so that viable jobs are not destroyed just because of a short-term shock.

A Real-World Test: The UK During the Financial Crisis

The researchers applied their model to the United Kingdom during the Global Financial Crisis, when unemployment rose sharply, and no large job retention scheme existed. In the model, the crisis pushes many firms into losses, forcing layoffs, especially in routine jobs. Unemployment jumps, and many workers are pushed into long and costly job searches.

When the researchers introduce a hypothetical job retention scheme, designed to prevent about half of the job losses, the results change dramatically. The rise in unemployment is cut in half, fewer workers are forced to switch occupations, and the economy returns to normal faster. Crucially, this also helps government finances. Although the policy requires public spending, it reduces unemployment benefit payments and preserves tax revenue. In the end, the budget deficit during the crisis is smaller than without the policy.

Who Gains the Most, and What It Means for Policy

Overall welfare improves under job retention schemes, though the gains are modest on average. The real story lies in who benefits. Low-income workers gain the most, often more than twice as much as middle-income workers, because the policy protects them from unemployment spells that permanently reduce earnings. When recessions last longer, the benefits grow even larger. Even when economic damage is permanent, short-term job retention still helps by allowing workers to move to new jobs while employed, rather than from unemployment.

The study also offers a warning. If job retention programs are badly designed or burdened with high administrative costs, their benefits can shrink or even disappear. But when implemented efficiently, the IMF researchers conclude, these schemes are a powerful form of insurance, not just for workers, but for entire economies.