Work Sharing is the Answer

August 10, 2011

Dean Baker
The American Prospect, August 10, 2011

See article on original website

The stock market’s recent plunge has caused normally sane people to panic about the economy’s prospects. It is important to recognize that the stock market has little direct impact on the economy. Few firms raise capital for investment by selling stock. The stock market primarily affects the economy through its impact on consumption. Most estimates of the stock-wealth effect put it in the neighborhood of 3 to 4 percent, which means that an additional dollar of stock wealth will add 3 to 4 cents to annual consumption.

This implies that the roughly $2 trillion in value that the market has lost in recent weeks can be expected to shave between $60 billion and $80 billion off annual consumption, or between 0.4 percent and 0.5 percent of gross domestic product. This drop in consumption is not helpful to the economy right now, but it is not devastating. Also, it will take a couple of years for the full effect of the lost stock wealth on consumption to be felt.

In short, people should not panic about the economy because of the plunge in the stock market. (The impact on your 401(k) is another matter.) However, this hardly means that everything is smooth sailing. Even before the market turmoil took over the news, the economy was largely dead in the water, expanding at a pace too slow to even keep up with the growth rate of the labor force, much less to make up for the 10 million jobs lost due to the downturn.

The best way to create jobs would be to boost demand with another round of stimulus. Any serious stimulus, though, seems to be off the table at this point. If it is not possible to increase demand enough to bring the economy back to full employment, we can go the opposite route of sharing the work that does exist.

The basic point is simple. If we encourage employers to deal with reduced demand by shortening work hours rather than laying people off, we can get back to full employment relatively quickly. Every month, firms lay off or fire roughly 2 million people. If this figure can be reduced by 10 percent through work sharing, it would be equivalent to creating 200,000 additional jobs a month.

A work-sharing policy uses the money that would otherwise go to unemployment benefits to compensate workers for part of their reduction in hours. For example, if workers have a 20 percent reduction in hours, under a work-sharing program, they might end up with an 8 percent to 10 percent reduction in take-home pay with the government making up the difference. Germany has used this policy with great success. Its unemployment rate has actually declined since the start of the downturn even though its growth has been only slightly better than ours.

Work sharing should not be an impossible leap politically. Twenty states already use work sharing as part of their unemployment-insurance system. However, the take-up rate is low because the programs are not well publicized and are overly bureaucratic. A bit of modernization and a relatively small amount of additional funding may go a long way.

This is something that could conceivably garner Republican support. Kevin Hassett, one of the top Republican economists, advocates work sharing. The German program is being pushed by a conservative government; although its origins were with a Social Democratic minister in the prior coalition government. German employers like the program because it means that they can keep skilled workers on the payroll. When demand does eventually pick up, they will only have to increase hours rather than find new workers.

From a progressive standpoint, work sharing can be an important step toward a more family-friendly work place. It may also lead to more environmentally friendly consumption patterns as people have more leisure and less income.

In short, there are lots of reasons to like work sharing. And when it comes to politically viable policies to create jobs, not much else is in the cupboard right now.

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