The Agenda

On Work-Sharing

Consider the following op-ed from Dean Baker and Kevin Hassett in the Los Angeles Times on work-sharing.

Currently, firms mostly respond to weak demand by laying off workers. Under a work-sharing program, firms are encouraged by government policy to spread a small amount of the pain across many workers. 

In Germany, for example, which has used work-sharing aggressively in this downturn, a typical company might reduce the hours of 50 workers by 20% rather than laying off 10 workers. The government would then provide a tax credit to make up for most of the lost pay, with the employer kicking in some as well. In a typical arrangement, a worker might see his weekly hours go down by 20%, and his salary go down by about 4%. 
This policy has kept the unemployment rate in Germany from rising even though the country has seen a sharper decline in GDP than the United States. The Netherlands, which also uses work-sharing, has managed to keep its unemployment rate near 4% even though its GDP also has fallen more steeply than in the United States.

One reason this idea appeals to me is that we’re spending staggering sums on extending unemployment benefits, and this comes at a high cost, both direct and indirect. The Pew Fiscal Analysis Initiative has a new study on long-term unemployment, which is far higher than it was in the early 1980s. The report is alarming: 44 percent of unemployed Americans have been unemployed for at least six months. During the early 1980s, in contrast, the long-term unemployed were only 26 percent of the total. Remarkably, the number of unemployed Americans who’ve been out of work for a year or longer is 23 percent.

Over the last five years, the Pew study notes that unemployment insurance spending has gone from $33 billion to $168 billion. Half of that $168 billion in FY 2010 has gone to the long-term unemployed. This further helps cushion the blow, and it can allow an unemployed person to be somewhat choosier about her next job. That might be a good thing. But it’s certainly very expensive. And it certainly seems as though the relative generosity of unemployment benefits is at least part of the reason people are taking a longer time to find jobs.

To be sure, Paul Krugman and many others economists find this idea implausible. They see the central problem as weak demand, and if anything they see extensions of unemployment benefits as prudent fiscal stimulus rather than a tradeoff between compassion and economic efficiency. Plenty of smart people disagree on this question. Casey Mulligan, for example, is convinced that a spate of employment-reducing policies are the key economic culprit.

My strong inclination is to believe that Mulligan is right: if implicit marginal taxes are increased through the advent of new means-tested programs, it seems likely that it will have an impact on work effort. And if unemployment benefits were precipitously withdrawn, more people would take jobs they consider undesirable but tolerable relative to the alternative. This, in turn, could help get the economy back on track. Mulligan writes:

In my view, people spend less as a CONSEQUENCE of problems of supply — they recognize that their incomes will be low so that spend less especially on durable goods like cars. While the entire economy suffers from a lack of supply, specific industries like manufacturing are disproportionately affected, so to them the recession is in fact largely a lack of demand.

Yet as Mulligan goes on to explain,

If all industries suffered from a lack of demand, we would see economy-wide labor usage and output falling in about the same proportion.

And that hasn’t been the case.

I wonder what Mulligan would make of the work-sharing proposal, which looks like an effort to tackle the incentives problem for workers and employers alike. 

[W]ith a work-sharing arrangement, workers would keep their jobs while effectively dividing up the unemployment benefits that they could receive if they were laid off. For example, if a furlough requires them to take every fourth week off, instead of a 25% cut in pay, their pay would fall only 5% to 10%. The additional money could come from either the state unemployment insurance program or a new federal tax credit.

The cost to the government of going this route would be roughly the same as with the current unemployment insurance program. The big difference is that instead of unemployment benefits that effectively pay people for not working, we would be paying people for working shorter hours. 

The benefits are clear. More people would stay in the workforce, and, as Baker and Hassett explain, it could help ease the recovery:

In addition to lifting net job creation, this policy also would accelerate the recovery. As firms ramp up production, the workers they need to do the work will already be on staff. Firms can avoid spending time and money searching for new workers.

One downside is that it would prove just as costly as the status quo, albeit while mitigating the perverse consequences of a more straightforward extension.

Reihan Salam is president of the Manhattan Institute and a contributing editor of National Review.

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