There are two basic ways to increase employment: increasing output and thereby increasing the demand for labor, or dividing up the existing work among more workers. . . . Work sharing is not a new idea. The idea of shortening work time to create more work has a long history. . . . [I]n an economy that is operating well below its potential — and projected to remain so for much of the next decade — work sharing may be the most viable way of bringing the economy back closer to full employment. Germany is the model in this respect. It has aggressively promoted a policy of work sharing, along with other measures aimed at persuading employers to retain workers. As a result, its standardized unemployment rate now stands at 6.7 percent, 0.4 percentage points below the rate at the start of the downturn. This remarkable achievement was not due to superior economic growth. Through the fourth quarter of 2010, the growth rate of Germany’s economy since the start of the downturn had actually lagged somewhat behind the growth rate of the United States. The fact that Germany’s unemployment rate had fallen, while the unemployment rate in the United States had risen by 4.4 percentage points, was entirely due to different labor-market responses to the downturn. . . . Though Germany’s experience with reducing work hours as an alternative to unemployment has been remarkable, it is important to note that most of the reduction in work hours was not brought about by the formal short-work program. The OECD (2010) estimated that only 25 percent of the reduction in hours worked in Germany was the result of the formal short-work program. It attributed 40 percent of the reduction in work hours to employer agreements with unions or work councils, 20 percent was the result of reduced overtime, and 20 percent came about through tapping work-hour accounts. While the role of the short-work policy was clearly important, this was in the context of a larger commitment to preserving employment. The overwhelming majority of the workers in short-work programs in Europe are men, disproportionately in their middle ages. Workers in medium- and large-sized firms are far more likely than workers in smaller businesses to be enrolled in short-work programs. The construction and manufacturing industry accounted for a hugely disproportionate share of the workers in short-work programs, although they also accounted for the bulk of the job loss in the recession, so the concentration of covered workers in these sectors may be more a function of the pattern of job loss than the nature of the programs. By education level, workers with college and advanced degrees were under-represented, as were workers without secondary degrees. . . . Based on the German experience, it is possible that employers will view shortening work hours as preferable to layoffs, even with little or no additional subsidy from the government. German employers have been very supportive of the country’s short-work policy in large part because they recognize the advantage of having workers on their payroll whose hours can be increased quickly when demand grows, rather than being forced to spend the time and money hiring new workers. However, there are other features of Germany’s labor market, that do not exist in the United States, that make short work more attractive there. First and foremost, Germany has a far higher union coverage rate, with approximately 43 percent of its workers covered by collective bargaining agreements compared to about 13 percent in the United States. This means that employers in Germany would typically have to negotiate layoffs with a union — they would not have the option to unilaterally lay off workers. Also, firms with more than 250 employees are required to have a works council that would also play a role in any layoff decisions. In addition, Germany has employment protection rules that do not allow employers to dismiss most workers at will. This means that most German employers have a strong incentive to develop plans for reducing work hours in ways that are most acceptable to their workers. These pressures do not, for the most part, exist in the United States. At the same time, employers in the United States do recognize the benefits of keeping their incumbent workers on the job, rather than being forced to hire new workers when demand increases. Even in the United States there was a substantial reduction in the length of the average work week in every sector of the economy, indicating that employers did not adjust labor demand exclusively through layoffs. If a better advertised, more generous, and less bureaucratic system were in place, surely employers would be more likely to take advantage of the option of short-work compensation. . . . Work-sharing programs would create an institutional structure that pushes toward less work per worker, countering the current bias towards longer hours created by the fixed cost nature of benefits such as health care insurance. If this leads to a reduction in labor supply (measured in hours) from the portion of the workforce without college degrees, this could lead to upward pressure on their wages, which would help to reverse some of the rise in wage inequality over the last three decades.
Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, including False Profits: Recovering from the Bubble Economy. This article was first published by CEPR in June 2011 under a Creative Commons license. Cf. Juliet Schor, “Counter-Intuition 101: Why Recent Bad Economic News Means It’s Time for Working Less” (12 June 2011).