Stabilizing Employment and the Economy Even During Tough Times

A little-noticed provision of the payroll tax cut extension signed into law by President Barack Obama in February encourages states to adopt so-called “work-sharing” programs as part of their unemployment insurance systems. Work sharing—or short-time compensation, as it is referred to in the bill—is a policy that provides an alternative to businesses facing the unwelcome prospect of having to lay off workers. Instead of laying off a single worker, a business instituting work sharing could, for example, reduce the hours of five employees by 20 percent while partially supplementing the workers’ lost wages with unemployment insurance money. The idea is to help businesses avoid layoffs during down times by giving them the option to spread the cut in hours among a larger group of employees.

The work-sharing policy included in the payroll tax cut extension bill echoes a proposal put forth by the Center for American Progress in 2009. In that report CAP proposed several steps that Congress should take to promote work sharing. We encouraged Congress to provide incentives for nationwide implementation of state programs and to instruct the U.S. Department of Labor to provide clearer regulations to states stipulating how those programs should be run. Both of these provisions were included in the new law, and prior iterations of this policy were also featured in President Obama’s American Jobs Act and championed in stand-alone bills by Sen. Jack Reed (D-RI) and Rep. Rosa DeLauro (D-CT).

As CAP’s proposal for work sharing points out, the program can provide tremendous economic benefits during a recession, as evidenced in other countries. Germany’s work-sharing program, for instance—known as Kurzarbeit—helped to keep total employment in Germany stable during the Great Recession, while employment in the United States during that same period dropped by almost 6 percent. Work sharing also makes sense from an investment perspective. Moody’s Analytics Chief Economist Mark Zandi estimates that a work-sharing program such as the one recently signed into law would generate an enormous return on investment—$1.69 for each dollar spent on benefits under the program. This is even higher than the multiplier Zandi estimates for unemployment insurance—$1.60 for each dollar spent. Additionally, work sharing has a number of benefits that make it easier for workers, families, and businesses to weather tough economic times.

Work sharing 101

Faced with less demand for their products during a recession, businesses oftentimes try to reduce costs by laying off workers. The result of this type of cost-cutting approach is to increase unemployment and further weaken the economy. Work sharing is a policy designed to combat that trend by allowing businesses to retain employees while still reducing costs. The way it works is simple: Instead of laying off a few workers, a company would reduce the hours of a larger number of employees. These employees would then be compensated partially for their lost income through unemployment insurance, while retaining the majority of their workload. Although the reimbursement to workers is generally not enough to completely make up for their lost pay, it usually provides about 50 percent of the pay they would receive for the hours cut. Under such a scenario, a worker who had his or her hours reduced by 20 percent would receive unemployment insurance equal to about 10 percent of his or her total wages, meaning the employee would earn about 90 percent of his or her normal pay while working about 80 percent of his or her normal hours.

Although some states had adopted work sharing prior to Congress passing the bill a few weeks ago, it was a fairly obscure program with only spotty implementation. As of 2011 only 20 states had modified their unemployment insurance programs to include work sharing as an option for employers. There were two primary obstacles that prevented more states from implementing the program. First, many states could not afford to pay for work sharing, as most states retained embarrassingly low unemployment insurance trust fund levels even prior to the recession. Second, confusion over work-sharing guidelines from the U.S. Department of Labor made many states wary of stepping into an administrative muddle. (see text box) The payroll tax cut bill, however, solves both of these problems by providing for federal financing of state work-sharing programs for up to three years and clarifying the state requirements under the program.

Work sharing supports workers, businesses, and the economy

If adopted by all of the states, work sharing will be highly beneficial for workers, employers, and the larger economy. For workers, the program will allow them to retain their jobs, avoiding the economic insecurity and social stigma that accompany unemployment. Affected workers will also retain access to their full medical and retirement benefits under the new provision, providing added security for them and their families. Furthermore, workers in short-time compensation arrangements will have the opportunity to maintain their work knowledge and skills, preventing a diminishing of skills that can result from lengthy unemployment and that may hamper future career prospects.

Employers likewise will see benefits from work sharing. First, employers will still be able to reduce costs when faced with decreased demand for their products and services through short-time compensation. Because workers will remain on the job and thus maintain their knowledge and skills, employers will also see dramatically reduced turnover and retraining costs compared to those of layoffs since they will not have to replace workers down the line. As the economy continues to improve, businesses will also be able to ramp up production much faster with workers who are already on payroll, eliminating or greatly lessening the need to hire new workers. Further, companies may also realize the benefit of work sharing in indirect ways such as increased employee loyalty.

But perhaps the greatest benefit of work sharing will occur in the larger economy. As the experience in Germany shows, work sharing can keep unemployment low even during a recession. Research shows that work sharing also boosts economic output by more than 1.5 times what it costs to operate such programs, leading to more economic growth and a faster recovery. Because of this, economists across the political spectrum—from Jared Bernstein, a former Obama administration adviser, to Kevin A. Hassett of the conservative-leaning American Enterprise Institute—all support work sharing.

Although it’s an ostensibly small policy change, this program has tremendous potential to further our economic recovery and mitigate the effects of future recessions. It is heartening to see that Congress and the president have embraced a commonsense, bipartisan reform that will help keep workers in their jobs, provide more security for middle-class families, and allow employers to respond more quickly to economic changes all at the same time.

Matt Separa is a Research Assistant with the Economic Policy team at the Center for American Progress.