Economics, Pethokoukis

Is work sharing an answer for high unemployment?

Economist Barry Eichengreen:

The United States today is facing a crisis of long-term unemployment unlike anything it has seen since the 1930’s. …

What is not well known, however, is that in the 1930’s, the United States, to a much greater extent than today, succeeded in mitigating these problems. Rather than resorting to extensive layoffs, firms had their employees work a partial week. The average workweek in manufacturing and mining fell from 45 hours in 1929 to 35 hours in 1932. We know this from a 1986 article by my Berkeley colleague James Powell and his co-author, none other than – wait for it – Ben Bernanke.

The 24% unemployment reached at the depths of the Great Depression was no picnic. But that rate would have been even higher had average weekly hours for workers in manufacturing remained at 45. Cutting hours by 20% allowed millions of additional workers to stay on the job. They continued to earn an income. They continued to acquire skills. They had hope and the possibility of advancement. …

An individual today, faced with the option of working 20 hours a week or drawing unemployment benefits, might be tempted by the latter. But, back in the 1930’s, before unemployment insurance, 20 hours was better than nothing.

Of course, unemployment insurance replaces only a fraction of most workers’ previous wages, which suggests that its effect in this regard is not very strong. But, even if unemployment insurance does not discourage work-sharing, it could be restructured to encourage it. Partial benefits could be paid to workers on short hours, rather than limiting payments to those who are fully unemployed. The program would at least partly pay for itself, with additional payments to workers on short hours offset by lower unemployment (and thus lower payments to those who are completely without work).

Other countries have gone further. In Germany, for example, the federal government’s Kurzarbeit program makes up a significant fraction of the difference when, owing to short hours, a worker’s earnings fall by more than 10%.

Would such a strategy work? Here is one study looking at the German system:

In this paper we estimate the employment effects of a reduction in weekly normal hours in West German manufacturing on the basis of an econometric models using industry panel data. We distinguish between unskilled, skilled and high-skilled workers and show that labor demand elasticities with respect to real wages differ significantly between these three skill groups. Given wages, the direct employment effect of a reduction in weekly normal hours is negligible for all three groups. However, taking the adjustment of wages into account, which compensates workers to some extent for lost income due to the reduction of working hours, the net employment effect becomes negative on average. Due to their relatively large wage elasticity, this negative effect is particularly strong for the unskilled. Work sharing by means of general hours-reductions can thus not be considered an adequate policy to reduce unemployment.

And another:

This paper reviews the theoretical arguments and the empirical evidence on the effects of reduced weekly working time on unemployment. Given the prominence in the European popular discussion, the scientific literature is astoundingly thin on the topic. The main findings can be summarized as follows: There are theoretical arguments that can form the basis for a positive effect on employment in response to a reduction in working time. However, they rest on strong assumptions that appear counterfactual. Econometric studies show little or negative effects on employment in Germany. Only a set of simulation studies predicts a positive employment effect – but again, they appear to rest on counterfactual assumptions. Hence, while the reduction of work hours may have increased workers’ utility – a legitimate goal of the unions – it does not appear to be justified as a cure against unemployment.

And this one:

Worksharing is considered by many as a promising public policy to reduce unemployment. This paper reviews the most pertinent theoretical and recent empirical contributions to the literature on worksharing. Next, we provide new empirical evidence on this issue by a longitudinal cross-country analysis of the long-run effects of a reduction in working hours on employment and wages, exploiting aggregate data for 16 OECD countries. The conclusions of the theoretical literature survey are indecisive: the efficacy of worksharing as an employment enhancing policy tool depends heavily on the setting in which the analysis takes place. In line with recent empirical studies, our results do not support the proposition that worksharing promotes employment. The results show a positive direct effect on employment of a reduction in working hours. However, taking into account indirect effects, in particular the upward effects on wages, we find that the long-run effect becomes small and insignificant.

This study from Rutgers is a bit more positive:

Starting in 1985, (West) German unions began to reduce standard hours on an industry-by-industry basis, in an attempt to raise employment. Whether this ”work-sharing” works is theoretically ambiguous. I exploit the cross-industry variation in standard hours reductions to examine their impact on actual hours worked, wages, and employment. Analysis of industry-level data suggests that ”work-sharing” may have reduced employment in the period 1984-1994. Using individual data from the German Socio-Economic Panel, I substantiate the union claim of ”full wage compensation:” the hourly wage rose enough to offset the decline in actual hours worked

It seems to me the economy needs to continue its process of shifting labor to where it can be used most productively. And while that may take time, it shouldn’t be stopped. This is what Arnold Kling calls The Recalculation Story. What government should be doing is creating as much of a pro-growth environment as possible.

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