Short-Time Compensation as a Policy to Stabilize Employment

Short-Time Compensation as a Policy to Stabilize Employment: by Wayne Vroman The Urban Institute and Vera Brusentsev University of Delaware November 2009 The Urban Institute is a nonprofit, nonpartisan policy research and educational organization that examines the social, economic, and governance problems facing the nation. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders or to the University of Delaware. Helpful comments on an earlier draft were received from Heiko Peters, Gunther Schmid and Frank Wiessner. Introduction Most of the world’s economies are experiencing a recession in 2009 and, for many, the recession is the most serious downturn in recent decades. Of the 182 economies in the International Monetary Fund’s World Economic Outlook database, 165 are projected to experience lower real gross domestic product (GDP) in 2009 compared with 2008.1 Since the demand for labor is a derived demand, a decrease in real output leads to a reduction in the number of hours worked and the level of employment. In the current global recession, large increases in unemployment and underemployment are occurring in many economies. Even if growth in GDP resumes in 2010, labor markets will only fully recover with a substantial lag extending over several years.2 One policy to influence labor use by employers is work-sharing short-time compensation (STC). This policy has the potential to preserve existing jobs and reduce employment losses in the current global crisis. The societal gains that flow from increased employment retention include enhanced income stability of affected persons and families, reduced open unemployment, and reduced training costs. Furthermore, STC shares the economic hardship of a recession among workers, employers, and governments. Short-time compensation involves a specific form of downward adjustment in labor input. Under STC, labor hours are reduced in line with the change in output, but the decrease in hours worked is spread among a larger pool of employees than under layoffs. As a simple example, consider the following two options: place all workers on a four-day work week (down from a standard five-day week) or terminate (lay off) 20 percent of the workforce. Both actions will reduce labor input by 20 percent. Work sharing widens the pool of persons affected by a downward adjustment, but the affected individuals experience a smaller economic loss under work sharing than under layoffs. The present report examines STC as an intervention in the labor market and provides observations about the design features that may make it more effective in preserving employment during an economic downturn. 1 See the World Economic Outlook database of the International Monetary Fund (IMF) at http:// www.imf.org/external/pubs/ft/weo/2009/01/weodata/weorept.aspx. 2 In the United States, the labor market is not likely to fully recover until mid-2010 or later. See “How long would a job market recovery take?” January 7, 2009 Economic Snapshot. Economic Policy Institute. http://www.epi.org/economic_snapshot/entry/webfeatures_snapshots_20091007/ 1 An Overview of Work Sharing Short-time compensation work-sharing programs, now present in many developed economies, reduce the volume of layoffs during a period of slack labor demand.3 Rather than reducing staff hours through layoffs (nonprejudicial separations) of some workers, a wider pool is selected and all members of that pool are retained. Those retained, however, work reduced weekly hours. For example, to reduce hours by 20 percent in a company that employs 100 persons working 40-hour weeks, there are two possible strategies. First, there would need to be 20 layoffs. Alternatively, all 100 people in the company could be placed on 32-hour schedules. Both measures would reduce hours by 20 percent. Short-time compensation programs provide partial unemployment compensation (UC) benefits to workers placed on short schedules. If, for example, UC benefits replace half of previous weekly wages, 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 wages. Thus part of the reduction in income occasioned by the reduction in hours is offset by partial UC benefits. In this simple example, the take-home pay of participants in STC work-sharing would be equal to 90 percent of their full weekly wages.4 In the present worldwide economic crisis, several countries are promoting STC with the objective of increasing its availability, generosity, and/or duration. In additi