Reconnecting to Work: Policies to Mitigate Long-Term Unemployment and Its Consequences

6 - Stabilizing Employment: The Role of Short-Time Compensation

113 6 Stabilizing Employment The Role of Short-Time Compensation Vera Brusentsev Swarthmore College Wayne Vroman Urban Institute One response to the Great Recession of 2008–2009 in several economies of the Organisation of Economic Co-operation and Development (OECD) was increased reliance on short-time compensation (STC) and other work-sharing arrangements that temporarily reduce weekly hours to ease labor market dislocations and to avoid the personal and economic costs of elevated levels of long-term unemployment. Short-time compensation has been credited with helping to stabilize employment in the face of sharp reductions in real gross domestic product (GDP). The research conducted by Burda and Hunt (2011) and Boeri and Bruecker (2011) concludes that the STC program in Germany (Kurzarbeit) was a major contributor in stabilizing German employment in 2009 and 2010. As labor markets in the United States recover from the Great Recession , it is appropriate to assess the performance of the economy during this period and consider ways of structuring labor market institutions to lessen the economic hardships of future recessions. Not only did U.S. product markets deteriorate, but labor markets also experienced sharp decreases in employment, steep increases in unemployment, and record high levels of long-term unemployment. Given the severity of labor market conditions since 2007, this chapter examines the recent performance of STC in states with such programs and assesses their impact on employment. The chapter begins with an introduction to STC and a description of some of the important features of the program, and then reviews the performance of STC in the United States for the 114 Brusentsev and Vroman 17 states that have operated programs for several years. The next section reviews foreign experience with STC, with particular attention to the performance of STC programs in Canada, Germany, and Belgium. The following section discusses ways to increase STC usage in the United States. While some suggestions are obvious, others would make changes in the way STC plans currently function within state unemployment insurance (UI) programs. The chapter reaches three main conclusions. First, STC has the potential to prevent layoffs and stabilize employment in short-run cyclical fluctuations. While program usage increases sharply at the start of a recession, the increased utilization lasts for a comparatively short period. Second, the programs in the United States are small in scale and do not meaningfully affect labor market adjustments at the macro level. Third, if STC were to play a larger role during the economic recovery as well as a larger role in future recessions, the programs would need to be enlarged and the pace of adoptions expanded. In addition to presenting suggestions for increasing STC usage, the chapter assesses the February 2012 legislation: the Middle Class Tax Relief and Job Creation Act of 2012 (PL12-96). AN OVERVIEW OF WORk SHARING Short-time compensation work-sharing programs, now present in many economies, are intended to reduce the volume of layoffs during periods of slack labor demand.1 Rather than reducing hours by laying off (nonprejudicial separations) some workers, a wider pool of workers at the workplace is retained but at reduced weekly hours of work. For example, to reduce hours by 20 percent in a work unit that employs 100 persons working 40-hour weeks, there would need to be 20 layoffs . Alternatively, all 100 in the work unit could be placed on 32-hour schedules. Both measures would reduce hours by 20 percent. These employment retention programs provide partial unemployment compensation (UC) benefits to workers placed on shorter schedules . For example, if UC benefits replace half of previous weekly wages, then someone on a 32-hour schedule would receive 80 percent of their full weekly wages and partial UC benefits equal to 10 percent of weekly Stabilizing Employment 115 wages. Thus, part of the reduction in income caused by the reduction in hours is offset by partial UC benefits. In this simple example, participants in STC would receive take-home pay equal to 90 percent of their full weekly wages.2 In the United States in 2011, 21 states had STC programs that were generally small in scale. While 4 states introduced STC programs during 2010 and 2011, the other 17 states have operated these programs for 20 years or longer. A program for STC is established through legislation as part of a state’s UI law. Short-time compensation plans, administered as part of UI, are initiated when...