With the nation's unemployment rate still hovering close to 10% -- more than 12% in California -- and the typical unemployment spell stretching to 20 months, politicians of both parties are rightly looking for ideas to improve labor market conditions. This recession clearly threatens to do permanent damage to the careers of a generation of workers, and policy action is urgent.
After surveying policies around the world, we found that there is one that clearly dominates in terms of impact and cost-effectiveness: work-sharing.
The idea is simple. 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.
Work-sharing should be familiar to Californians because it's a variation of the furlough policy that state and local governments have used to avoid further layoffs. The big difference is that the furlough policy means workers take pay cuts that are proportional to the length of their furlough -- 20% fewer hours, 20% less pay.
By contrast, with 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.
California, and 16 other states, already have some form of work-sharing. California's program dates from the 1970s and applies to both public- and private-sector employees. However, these programs are underutilized. Many workers and employers do not even know of their existence. A broad federal program, publicized extensively from the bully pulpit of the White House, would have great promise.
In addition, instead of waiting for companies to reach the point where they plan to lay off workers, the government could instead encourage companies to merely shorten hours. This could be done in any number of ways. Perhaps the simplest approach would be for the government to provide a credit roughly equal to what would be the proportional unemployment benefit to support the salaries of workers who work reduced hours.
The effect of work-sharing on employment can be substantial even when the economy has stopped losing jobs. Even now, firms in the private sector lay off or fire about 2 million workers each month. This is offset by roughly the same number of hires, so that net employment does not change much. However, if work-sharing policies could reduce the number of monthly dismissals by 10%, this would have the same effect on employment as creating 200,000 jobs a month.
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.
Congressional members of both parties have begun crafting a number of bills to enact work-sharing. The American people clearly want politicians to put aside their differences and focus on sound economic policies. Work-sharing would be a great place for them to start.
Dean Baker is the co-director of the Center for Economic and Policy Research. Kevin Hassett is the director of economic policy studies and senior fellow at the American Enterprise Institute.