Washington, DC – It is clear that we are not going to see any major action from the federal government to reduce unemployment any time soon. There is no hope that this Congress will support another round of stimulus and not much more hope from the next Congress, even if the Democrats somehow regain control.
What that means is that we are looking at a long, painfully slow recovery. Assuming that the economy continues to generate 200,000 jobs a month, roughly its average over the last three months, we will not get back to more normal levels of unemployment until somewhere near the end of the decade.
And it is certainly plausible that progress will be worse. That story assumes a recovery lasting for more than a decade, something the United States has never experienced.
This means that we should expect to see a labour market in which millions of workers will be unable to find jobs for long into the future. They will be unable to adequately support their families, and may even lose their homes, all because the folks in charge of running economic policy don’t know what they are doing.
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While economic policy is best made at the national level, as a result of the bill that extended the payroll tax cut, there is a policy that states can pursue that might make a real difference. This bill included a provision that calls for the federal government to pick up the tab for state spending on work sharing as part of the state’s unemployment insurance programme. This means that states can save themselves a great deal of money if they can encourage employers to use work sharing as an alternative to layoffs.
Work sharing, formally known as “short work”, is an arrangement whereby employers reduce the hours of their existing work force instead of laying off workers. For example, if an employer was going to lay off 10 workers, she can instead have the same reduction in labour time by reducing the hours of 50 workers by 20 per cent.
Under the unemployment insurance system, workers would typically be entitled to roughly half of their pay if they were laid off. Under the short work system, the government would make up roughly half of the lost wages for workers who were put on short time. In this example, if their hours were cut back by 20 per cent, the government would make up half of the lost wages, or 10 per cent of their total wages. This leaves the worker earning 90 per cent of their former wages while working 80 per cent of the time.
The bill that extended the payroll tax cut included a provision that was taken from a bill originally proposed by Senator Jack Reed and Representative Rosa DeLauro that reimburses states for the money that they spend on their short work programme. This gives the 23 states that already have short work programmes in place an enormous incentive to promote work sharing as an alternative to laying off workers.
While the unemployment benefits that would be paid to laid off workers come directly out of the state’s unemployment insurance fund, the state would be reimbursed 100 per cent for the money paid to workers who have their hours cut. The states that don’t currently have programmes in place could also receive federal money to establish short work programmes.
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At the moment, less than 40,000 workers nationwide are on short work programmes. To increase this number, states will first have to publicise the system. Many employees don’t even know that the programme exists.
States should also try to increase the flexibility of the system. Most of these programmes were put in place more than 30 years ago. In many cases they are overly bureaucratic. For example, an employer may be required to specify in advance exactly which workers will have their hours reduced, and by how much time over a three to six month period. Such restrictions can make the short work system sufficiently unattractive that few employers will want to go this route.
However, there have been notable success stories. Germany’s unemployment rate is lower today than at the start of the recession largely because it has encouraged employers to keep workers on the payroll working fewer hours rather than laying them off. Its growth has been no better than growth in the United States over the last four years.
There are also examples in the United States of companies that use work sharing effectively. In addition to keeping workers on the job, companies also benefit from retaining skilled employees. As a result, when demand picks up they need to only increase hours rather than search for and train new workers.
There also could be longer term benefits from work sharing. Workers in the United States spend many more hours on the job than their counterparts in other wealthy countries. We are the only wealthy country that does not guarantee workers some amount of paid vacation, sick leave, or parental leave. If work sharing gets workers used to the idea of working less for somewhat less pay, perhaps it will lead to a new push for getting the sort of guaranteed time off that workers in other countries take for granted. That would be a huge bonus from a policy that at the moment also offers the best hope for getting unemployment down to more acceptable levels before the end of the decade.
Dean Baker is co-director of the Centre for Economic and Policy Research, based in Washington, DC. He is the author of several books, including Plunder & Blunder: The Rise and Fall of the Bubble Economy, The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich, Get Richer and The United States Since 1980 and The End of Loser Liberalism: Making Markets Progressive.