An Alternative to Mass Unemployment: Short-time Programs

In March 2020, social distancing measures to stop the spread of COVID-19 led to the closure of schools, universities, restaurants, cafes, hotels, offices, factories and many other kinds of workplaces. Unemployment insurance claims in the US were unprecedented and, despite moves to reopen the economy, the figures for August show 13.6 million U.S. workers unemployed (U.S. Bureau of Labor Statistics 2020) and 29.2 million receiving unemployment benefits (U.S. Department of Labor 2020).

The headline unemployment number was reduced by workers’ reluctance to search for work during a pandemic, and the number of people receiving benefits was increased by new benefits for freelancers, young people entering the labor market, the lowest earners and others typically excluded from traditional unemployment insurance.

This rapid increase in unemployment was avoidable. In Germany, output declined by almost 12% in the first two quarters of 2020, slightly more than in the U.S., but unemployment hardly increased. In April, when the U.S. unemployment rate peaked at 14.7%, the German rate was 4%, and the latest comparable figure shows the U.S. rate double that of Germany, 8.4% versus 4.4%. Elsewhere in Europe, the drop in output was greater than Germany or the U.S., but unemployment has only inched up (Table 1).

High unemployment should worry Americans, because even if the economic recovery were quick, the consequences could be long-term. Job losses affect workers earnings and may damage workers’ long-term mental and physical health. After the dot-com recession and Great Recession, a considerable share of unemployed workers gave up their job searches and dropped out of the labor force (Krueger 2015). The increasing average length of unemployment spells, structural changes in the economy, mass incarceration and restrictions on millions of undocumented migrants have played a role in making U.S. labor force participation decline since 2000 to the point where it is now below average for the Organisation for Economic Cooperation and Development and even with European Union countries Figure 1).

What explains the superior performance of European labor markets during the pandemic? An important reason for low unemployment in Germany has been working time reductions: during the last crisis, the average yearly hours per worker in Germany in 2009 fell by 3.3%, the corresponding U.S. figure fell by about 1.3% (OECD). The Kurzarbeit (“short-time work”) programme has, since the 1970s, supported employers that reduce working time rather than laying workers off (Herzog-Stein and Seifert 2010). In May 2020, Kurzarbeit numbers reached an all-time high of seven million workers, before declining to around five million in August. In France, the number of participants is even higher, and the share of the workforce on short-time compensation schemes reached 40% in Switzerland, Italy, France and Luxembourg (Mueller and Schulten 2020). During the Covid era, the Organisation for Economic Cooperation and Development estimates that these schemes supported 50 million jobs, 10 times more than during the Great Recession (Scarpetta et al 2020).

The U.S. does not lack an equivalent to Kurzarbeit. Enshrined in federal legislation, short-time compensation schemes are administered by states and have names like Work Sharing (New York, California), Shared Work (Connecticut, Washington), WorkShare (Massachusetts, Maine, Rhode Island), and Short-Time Compensation (Florida). However, only 26 U.S. states have them, and the number of workers covered is small and declining. At their peak in participation levels this past July only 400,000 workers were receiving short-time compensation benefits; by mid-August, the numbers decreased to 270,000 (Department of Labor). While around 20% of German workers were enrolled in Kurzarbeit during the peak, only 0.25% of U.S. workers were participating in short-time programs.

Why do so few workers receive short-time compensation benefits in the U.S.? Because of employment protection rules and strong worker rights to negotiate over layoffs, German employers have a strong incentive to avoid layoffs beyond the Kurzarbeit subsidy. U.S. employers do not face these legal barriers to laying workers off, and one disincentive to layoffs – paying the cost of unemployment benefits through increased unemployment insurance premiums – has been weakened and in some states suspended during the COVID-19 crisis. Indeed, American employers are positively penalized for finding alternatives to layoffs due to high health care costs. Medicare for all, just-cause dismissal protections, and strong unions would create stronger incentives for employers to use short-time compensation schemes.

Increasing the take-up of short-time compensation will require making it more attractive to employers, but it does not require an overhaul of U.S. labor market institutions. Adjusting the formulas for funding short-time compensation may increase uptake, especially if the program cost-saving incentives can override unemployment insurance costs resulting from layoffs as well as turnover costs resulting from recruitment and training of new hires. The comparison with Germany illuminates some features of program design that would make a significant difference.

1. Most US employers have never heard of their states’ short-time schemes (Balducci et al 2016). This is in contrast to Germany, where Kurzarbeit claims are an important early indicator of economic downturns. Even in the restaurant sector, which is characterized by small businesses, employers are very well informed and make use of short-time work for 45% of their employees, although protection against dismissal is likely to be comparatively low there (source: employee survey of Hans Böckler Foundation, June 2020). In the U.S., most states have lacked the resources to do effective outreach with employers, the exception being Rhode Island. During the great recession Rhode Island aggressively marketed its program and upgraded its communication with employers, and in 2009 it received one Worksharing claim for every six unemployment insurance claims (Abraham and Houseman 2014). Marketing and communication with employers would, together with simplifying the application process, increase uptake.
2. Short time compensation is optional for states in the US, whereas in Germany it is a nationwide program administered by the federal employment agency. The 26 US states with short-time compensation schemes account for 70% of the country’s workforce, including both ‘red states’ (Texas, Florida) and 'blue states' (California, New York). Turning short-time compensation into a national program or mandating that states introduce their own program would extend access to these benefits to an additional 30% of the U.S. workforce.
3. Employers in the US normally have to pay back part of the cost of short-time compensation schemes. Classic unemployment insurance in the U.S. is funded entirely by employer contributions, and experience rating penalizes employers not only for laying people off, but also drawing on unemployment insurance funds for short-time compensation. In Germany, workers and employers pay into unemployment insurance but they keep the Kurzarbeit subsidy after it is paid. During the COVID-19 crisis, the cost of U.S. states’ short-time compensation schemes was taken over by the federal government, and experience-rating penalties were suspended, but not all states communicated this fact to employers (or even Department of Labor staff) in a timely manner. Providing permanent federal subsidies for short-time programs, or at the very least establishing automatic triggers for federal support during economic downturns, would eliminate the cost-disincentives currently facing employers.
4. In the US, the cost of health insurance and retirement (social security) benefits are a key factor driving employers’ preference for lay-offs over short-time work. Employers do not have to pay for these benefits when they lay off workers. But for workers, being able to enjoy health care coverage is critical, particularly during a pandemic-driven economic crisis. In Germany, the part of the costs of social insurance contributions have been taken over by the Kurzarbeit program. Short-time would be more attractive to employers if it took over some of the costs of fringe benefits.
5. Short-time compensation schemes in U.S. states only last 26 weeks; in Germany it was extended to 24 months. The cost of doing this is in the short run not much more than paying unemployment benefits, and in the longer run maintaining the attachment between worker and employer reduces the unemployment spell. Extending short-time compensation benefits for a longer period would make the program attractive to employers that need more than 26 weeks to recover from the downturn.

The U.S. does not have to accept mass unemployment. Short-time compensation is a relatively low-cost program that already exists to prevent or at least slow mass unemployment. With some reforms, it could protect a much larger number of jobs.

References

Abraham, K. G., & Houseman, S. N. (2014). Proposal 12: Encouraging work sharing to reduce unemployment. Policies to Address Poverty in America, 129.

Balducchi, D. E., Wandner, S. A., Goger, A., Miller, Z., Shetty, S., Agbayani, C., & Eucogco, J. (2016). Employer Views about the Short-Time Compensation Program: A Survey and Analysis in Four States.

Bundesagentur fuer Arbeit. (2020) Monatsbericht: August.

BLS (2020) The employment situation: August 2020. September 4.

DOL (2020). Unemployment Insurance Weekly Claims. September 3.

Herzog-Stein, A. and Seifert, H. (2010). Der Arbeitsmarkt in der Großen Rezession – Bewährte Strategien in neuen Formen, WSI-Mitteilungen, No. 11/2010

Krueger, A.B. (2015). How Tight Is the Labor Market?, NBER Reporter No. 3/2015

Mueller, T. and Schulten, T. (2020). Ensuring fair short-time work - a European overview, ETUI Policy Brief No. 7/2020

OECD (2020). Statistics database.

Scarpetta, S., Pearson, M., Hijzen, A. and Salvatori, A. (2020). Job retention schemes during the COVID-19 lockdown and beyond. Paris: OECD

Table 1: Economic effects of the Coronavirus in 2020 (Source: OECD)

Note: Unemployment Rates harmonised, number of unemployed as share of labour force, seasonally adjusted 

Source: OECD Main Economic Indicators