Work Sharing: A Creative Way to Avoid Unemployment

Published on Real-World Economics Review Blog (first on The Guardian), by Dean Baker, March 1, 2012.

One of the little-noticed items attached to the extension of the payroll tax cut was a provision that would promote work sharing as part of state unemployment insurance systems. The provision, which is based on a bill introduced in the Senate by Jack Reed and in the House by Rosa DeLauro, would reimburse states for money spent on work-sharing programs that are part of their unemployment insurance system. It would also provide funds for the states that do not currently have work-sharing systems to establish them.  

This provision is a rare victory of bipartisanship and commonsense. The basic logic of work sharing is straightforward. Under the current system of unemployment insurance, workers who lose their job can get roughly half of their pay in benefits. However, if a worker has their hours cut back because of inadequate demand, they don’t get in any way compensated for the lost pay. This effectively encourages employers to go the route of layoffs rather than shortening work hours, since that is the only way that workers can benefit from unemployment insurance.

Work sharing gets around this asymmetry. It allows workers to be compensated for part of their lost pay when their employer reduces their work hours. This means that if an employer decides to reduce the work hours of 50 workers by 20 percent, as opposed to laying off 10 workers, the 50 workers can get half of their lost pay (10 percent of their total pay) covered by unemployment insurance. This means that workers will end up working 20 percent fewer hours for roughly 10 percent less pay … //

… The potential impact of work sharing on unemployment is enormous. While the economy as a whole is adding jobs, we still have enormous churning each month. Every month, roughly 4 million workers leave their jobs, with 2 million leaving involuntarily. If the number of people being laid off can be reduced by 5 percent, this would be equivalent to adding 100,000 additional jobs each month, which translates to 1.2 million by the end of a year.

Work sharing has been used successfully elsewhere. Germany’s unemployment is 1.5 percentage points lower today than it was at the start of its recession. This is not due to Germany’s growth performance, which actually has been somewhat worse than the U.S. Rather, the difference is that Germany has been successful in persuading employers to keep workers on the job, even when this has meant a shortening of hours.

We might not have the same success with work sharing as Germany, but if we can generate 1-2 million additional jobs by promoting shorter hours, this would be a really big deal. The bill passed by Congress and signed by President Obama last week is a big step in this direction. (full text).

Comments are closed.