With the nation's unemployment rate still hovering close to 10 percent 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 there is one that 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 percent 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.
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In a typical arrangement, a worker might see his weekly hours go down by 20 percent, and his salary go down by about 4 percent.
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 percent even though its GDP also has fallen more steeply than in the United States.
Work-sharing is a variation of a furlough policy. The big difference is that the furlough policy means workers take pay cuts that are proportional to the length of their furlough -- 20 percent fewer hours, 20 percent less pay.
By contrast, with a work-sharing arrangement, workers would keep their jobs while effectively dividing up the unemployment benefits they could receive if they were laid off. The additional money could come from 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.
A broad federal program would have great promise.
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 percent, 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.
Baker is the co-director of the Center for Economic and Policy Research. Hassett is the director of economic policy studies and senior fellow at the American Enterprise Institute.