To Have and to Hold: A Dynamic Cost-Benefit Analysis of Temporary Unemployment Measures

This paper analyses the temporary unemployment regulations that several governments of European countries have introduced during the recent recession. We view these measures as a collection of real options that governments provide to firms and value these options. We study, in particular, the effect of such measures on the liquidation decision of the firm. In addition, we study the effect of government limitations on the duration of the programme. We find that temporary unemployment measures delay a firm’s liquidation. However, since the costs of the programme are incurred before the benefits, the discounted benefit-to-cost ratio does not necessarily indicate the programme is good for welfare.