Job Creation Strategies That Work

The First in a Series of Proposals from the Center for American Progress

Our goal in this series is to offer job creation ideas that can fit squarely within the fiscal bounds of the political climate today in Washington. Some of our ideas will require additional federal spending, but all of our proposals are well within the financial means of the federal government. Others don’t cost anything. All would create jobs.

And jobs are sorely needed. The U.S. economy has gained more than 1.1 million jobs since the labor market hit bottom in September 2010. Yet, we still have almost 7 million jobs fewer than when the recession started in December 2007. In 2009, we laid out a set of initiatives that would generate strong job creation. But after taking aggressive action in 2009 to end the Great Recession and start the economy growing anew, policymakers in Washington today are unwilling to embrace major job creation initiatives.

Here we present the first of our ideas that we believe could be achievable in Washington today—Center for American Progress Senior Economist Heather Boushey looks at ways to create jobs by keeping those employed in their jobs.

Every month, millions of people leave jobs and millions get hired into new jobs. If we want to boost the net new jobs number then we can focus either on decreasing the number of workers leaving jobs involuntarily or on increasing the number of new job openings.

Our proposal today focuses on keeping the employed in their jobs. In April, for example, the economy added 232,000 net new jobs: 3.74 million workers separated from their jobs, 1.86 million of them voluntarily, while 3.97 million workers were hired. Reducing the number of workers who involuntarily leave their jobs could have a significant effect on overall employment and may even be easier than encouraging new hiring. As the conservative American Enterprise Institute economist Kevin Hassett points out:

If we can slow job destruction even a little bit, then we will have set the stage for big increases in net job creation. If the rate of involuntary job loss can be reduced by 10 percent, then it would have the same effect on employment as if the economy generated an additional 200,000 jobs a month.

When businesses need to cut back on staffing, they have two options: lay off workers or reduce hours of work. There are strong incentives in the U.S. labor market to simply lay off workers—benefits are often tied to the worker, not their hours. But policymakers could do more to encourage employers to reduce hours and keep workers on payrolls instead.

Encouraging reduced hours could have a significant effect on employment. New evidence from Germany shows that “short-term work programs,” which encourage employers to reduce hours rather than lay off workers, are associated with reduced unemployment. Recent research by the International Monetary Fund points to the importance of the massive expansions to Germany’s short-term work program called Kurzarbeit, which led to hours reductions but not unemployment. While the country’s economic output fell more during the Great Recession than it did in the United States (through the winter 2010), the German unemployment rate actually decreased.

The Kurzarbeit model is not directly applicable in the United States because the program was implemented in an economy where unions are stronger and labor relations with the business community are more cooperative. But increasingly, there is an appetite in the United States to find something similar that would work in our own economic context. The basic ideas floating around are to provide tax incentives or other incentives for companies to keep workers on payroll at reduced hours.

There are already two programs within the U.S. unemployment insurance system that encourage firms to adopt work-sharing. Currently, 20 states have opted into the “short-time compensation” or “work-sharing” program within their unemployment insurance system. This program allows workers to receive partial benefits from the unemployment insurance system if their hours have been reduced—not just if they lost their job or their pay is reduced.

The unemployment insurance system also provides partial benefits to workers whose wages have been cut (including due to working part time) but the thresholds are fairly low. The unemployment benefit is typically equal to the difference between the weekly benefit amount and earnings, and all states disregard some earnings as an incentive to take short-time work.

Elsewhere, CAP has argued that Congress should promote nationwide implementation of the short-term compensation program by encouraging the Department of Labor to provide clear guidance on the program and encourage more states to adopt it. The short-term compensation program was established as a temporary program in 1982 and made permanent in 1992.

But there were discrepancies in the 1992 legislation that created an “administrative muddle” about what exactly states are allowed to do. The 1982 legislation had required that any employer who participated must continue health insurance and retirement benefits, and that the program must have the consent of bargaining representatives in unionized shops. The 1992 legislation, however, did not include those provisions, which has led to a lack of clarity about the program requirements.

Here’s how to fix that problem. Congress could adopt a technical amendment as part of an extension of the federal Emergency Unemployment Compensation program or another legislative vehicle. Enactment of an amendment would send a clear signal that states should adopt short-time compensation laws as an option for employers.

Congress should also consider temporary financing to states to fund work-share benefits. This proposal has support from a wide array of sources and ideological perspectives, including the former economic advisor to the 2008 presidential campaign of Sen. John McCain (R-AZ), economist Mark Zandi, and the progressive Center for Law and Social Policy.

An alternative to using the unemployment insurance system to encourage work sharing is to use the tax system to encourage companies to reduce the number of hours that some or all of their employees work. Economist Dean Baker at the Center for Economic and Policy Research has proposed a tax credit for job sharing. The federal government, he says, could “use tax dollars to pay firms to shorten the typical workweek or work year while keeping pay constant. If workers’ purchasing power is held constant even as they work fewer hours, then labor demand will be held constant.”

There was legislation for both kinds of job-sharing plans introduced, but not taken up by committee or voted on, in the previous 111th Congress. The Keep Americans Working Act S.1646/H.R.4135 would have reformed the unemployment insurance system to encourage greater use of short-time compensation. And the SHARE Credit Act of 2009, HR. 4179 would have implemented tax credits to encourage job sharing. The current 112th Congress should take up both pieces of legislation in their current session.

Work sharing may not create jobs, but it will certainly help keep those who have a job at work if employers need to reduce hours. We’ve seen this policy work—very effectively—in other countries. And it’s a relatively simple (and cheap) way to reduce unemployment here at home. For workers and their families and for the broader pace of economic recovery, Congress clearly needs to consider these job-sharing ideas, and soon.

Heather Boushey is a Senior Economist at the Center for American Progress.

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