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Dean Baker

Dean Baker is co-director of the Center for Economic and Policy Research

July 1st, 2011 3:35 PM

How to make short work of unemployment

Washington always does a superb job of focusing intently on problems that are of little importance. The current, end-of-the-world debt/deficit negotiations is a great case in point. President Obama and the Republican congressional leadership are heatedly negotiating a deal on the deficit that has almost nothing to do with the country's real economic problem: mass unemployment.

The whole effort is a ridiculous charade that is intended to fix a problem that does not exist. There is no story of runaway spending or deficits, as everyone who has ever looked at the budget numbers knows. The deficit exploded, beginning in 2008, because the economy collapsed: end of story. Anyone who says otherwise either has never looked at the budget or is not being honest.

The longer-term deficit story is equally clear: the United States has a broken healthcare system. Since more than half of healthcare costs are paid through government programmes like Medicare and Medicaid, this translates into a budget problem. If we paid the same amount per person for our healthcare as any other wealthy country, then we would be looking at surpluses in the long term, not deficits.

If the economy were otherwise fine, the rest of us could just kick back and enjoy the theatrics. However, things are about as far from fine as they could possibly be right now, with close to 25 million Americans unemployed, underemployed or having given up looking for work altogether. While most of the routes back to full employment through increased demand appear blocked right now (largely because of the deficit fetishism), there is an alternative path. Instead of increasing demand, we can adopt a policy that promotes sharing of the work that it available. In other words, we have the same amount of work, but we have more people working.

The model here is Germany. It has used a "short work" policy to keep the unemployment rate down – at very low cost to the government. Its unemployment rate today is 0.5 percentage points lower than it was at the start of the downturn, even though the German economy actually has grown less than the US economy over this period.

There are many different packages that fit the short work scheme, but the basic story would be that rather than having a firm lay off 20% its workers, the government encourages the firm to cut their work time by 20%. The government directly replaces 60% of the lost wages (12% of the total wages); it has the company replace 20% (4% of total wages); and leaves the worker taking home 4% less and working 20% fewer hours.

The cost should be about the same as the unemployment insurance benefit that workers would have received if they were laid off, but the short work policy keeps them employed. This has two major benefits. From the standpoint of employers, they have workers available whose hours can be quickly increased if demand picks up. This saves them the need to find and train new workers.

From the standpoint of workers, this keeps them employed and tied to the workforce. They maintain their skills (Germany also offer training subsidies that can be used in many cases), and they don't run the risk of becoming unemployable as a result of long-term unemployment. This is especially important in the US context where a large share of the unemployed have now been without work for long periods. If nothing is done to increase employment soon, many of these workers may never find jobs again.

Interestingly, this programme was started by a Social Democratic minister in the unity government that was in power in 2008. But Angela Merkel, too, has embraced it, and the conservatives are as supportive of the policy as the Social Democrats.

It's worked for Germany but this would not, in fact, be a new policy for the United States. Twenty states now have short work programmes tied to their systems of unemployment insurance. But it is not widely used. The problem is that these schemes are poorly publicised and overly-bureaucratic. Ideally, congress would change some of the conditions that make short work less desirable than conventional unemployment insurance for more employers and employees. The most important change would be to turn it into an employer tax credit that is tied to reducing average hours by a specific amount, while keeping the number of employees constant. This would avoid the problem of having to specify months in advance how many hours each worker would work.

There is also no reason that the extended benefits that are available for the standard unemployment insurance programme should not also be available for the short work programme. Certainly, there is no public interest served by encouraging unemployment over shorter hours.

We must constantly remind the folks who make economic policy that the reason so many people are out of work is because the policy-making types didn't do their jobs. Every day, they should feel the need the repair the damage caused by their incompetence. Short work is one route that can get us back towards full employment.

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