Friday, June 27, 2014

Is Work-Sharing a Policy Alternative That Can Reduce Poverty and Unemployment?

Although the Great Recession technically ended about five years ago, we are still feeling the effects of the financial crisis that engendered the recession. Increases in employment can barely keep up with population growth, and unemployment is still a major issue. There are those who are well-intended, but suggest poor public policy, such as raising the minimum wage or increasing unemployment benefits. I was reading a paper recently published by the centrist Brookings Institution coming up with various policy alternatives. One such policy they wrote about was the  encouragement of work-sharing.

Work-sharing is an agreement in which employees redistribute labor hours amongst themselves in order to help maintain the employment rate (i.e., prevent layoffs), usually because of reduced demand on the employer's part, but sometimes to help employees create a better work-life balance. Work-sharing is slightly different from job sharing. Job sharing has no ties to unemployment insurance whatsoever. Under work-sharing, the individual would be offered prorated unemployment insurance (UI) in addition to maintain their employment on a part-time basis, which is particularly useful when there is temporary, counter-cyclical demand. What this means that instead of laying off twenty workers, one hundred employees would temporarily receive a 20 percent reduction in their wages while receiving a smaller compensation of UI.

One of the distinct advantages of implementing work-sharing is that labor hours can be redistributed in lieu of causing involuntary unemployment. Considering how long-term unemployment makes it more difficult for the unemployed to regain entry into the labor market, this alternative would help reduce the number of long-term unemployed. In addition to avoiding layoffs, it would help businesses retain valued employees while avoiding hiring costs for when the economy does get better. Firing and hiring cost businesses money, and cutting back on those labor costs would also help businesses. Based on these analyses, work-sharing seems to work, as long as output does not deteriorate (Böckerman and Kiander, 2002).

Germany is usually touted as the shining example of how work-sharing programs can succeed (Baker, 2011). Ezra Klein makes a good point, which is that work-sharing works better when there are an inordinate amount of labor laws that make the firing process take months. What the St. Louis Federal Reserve found in 2013 is that it is more difficult to implement in the United States because it is arguably both easier to lay off workers and for workers to find a new job, i.e., the United States has a less rigid labor market that makes it easier to allow for workers to shift from declining sectors to growing ones.

Seventeen states have implemented work-sharing programs already, including California. Although it could be due to mismanagement or not enough PR, I would put my money on the fact that the nature of labor markets is notably different in the United States than it is in Europe. If you can get the conservatives over at the American Enterprise Institute on board (also see Hassett and Strain, 2014), work-sharing is probably an above average policy.

That being said, I do have some reservations, most notably as to whether work-sharing only has negligible effects (Kapteyn et al., 2004Jacobson and Ohlsson, 2000). Another one is that although the cost of the policy would be roughly that of the current UI system, it would make people even more dependent on the government for their livelihood, which is not something that sits well with me. Work-sharing can be viewed as a way to hide the extent of labor market issues by artificially increasing the employment rate. Work-sharing also assumes that there are a fixed amount of work-hours to be had, and that the status quo is preferable. Markets are dynamic and interconnected, and thus need the ability to adjust when new situations come along, even if that is a recession. We should be encouraging entrepreneurship, not discouraging it. If there were a bright side to recessions, it would be that it weeds out inefficient businesses and allows for remaining businesses to be more efficient in their practices, thereby causing a more efficient allocation of scarce resources. While labor is an important element of running a business, there is also capital, land, and entrepreneurship that are vital inputs, which is why businesses need that flexibility to make the choice about which inputs at what proportion are more important. This is especially true if work-sharing became more of a norm, as well as a labor rigidity that would make it more difficult to fire employees.

Work-sharing seems to be an improvement over the current UI system. You keep employees working, there is less of a "long-term unemployment epidemic" that causes economic and social costs, and the other benefit here is that employment levels are maintained (as opposed to straight-up UI benefits, which actually decrease employment levels). I wouldn't necessarily be opposed to trying out an expansion of work-sharing, especially if employers collaborate with the government's UI program on a voluntary basis. Conversely, since my reservations still remain, I would also suggest looking for other alternatives in the meantime.  

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