Job-Sharing in Germany, Unemployment Checks in the U.S.

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Tuesday, October 05, 2010 at 3:58 pm

Yale economist Robert Shiller has a column on inflexibility in the labor markets that provides commonsense insight into the current unemployment situation. To explain why the market for, well, human-provided work does not function like the market for, say, corn, he cites Truman Bewley’s paper, “Why Wages Don’t Fall During a Recession?”

If demand falls in markets for other productive factors — say, wheat as an ingredient in the baking of bread — the price usually drops until the excess supply is mostly gone. What is unusual about the market for labor is that excess supply, which shows up as unemployment, can be prominent and persistent. Why? In short, the difference is morale. Factors of production like wheat or trucks or pumps don’t have morale issues. Human beings do.

How these issues affect the labor market is a major focus of the research of Professor Bewley, who is a colleague of mine at Yale. He has developed an idiosyncratic approach, interviewing hundreds of corporate managers at length about the driving forces for their actions. The managers consistently told him that they are concerned about the emotional state of their core employees. They said that their companies’ continued success depends on the positive feelings and loyalty of these workers — and lamented the hard choices that would need to be made in a severe downturn.

Keeping all employees relatively idle while reducing their pay or cutting their working hours will hurt everyone. Managers say they usually consider it better to protect the crucial workers — and to engage in sudden mass layoffs of others.

This makes sense, from the business owners’ perspective: Sacrifice a few to save many. But unfortunately, the logic is a bit false. Often, managers let go of too many workers, eager to avoid another round of layoffs. That overworks the survivors. Moreover, studies show that the employees spared layoffs don’t feel relieved — they feel guilty. That means they spend less. And, often, they convince their bosses to put off new projects or investments, to avoid seeming like the company privileges products over people.

Job-sharing programs or pay cuts to avoid layoffs, when explained clearly to workers, actually aren’t as bad as they seem. The United States uses such programs only sparingly, but other countries do so enthusiastically. Germany, for instance, has a program called “Kurzarbeit,” or short work. Big employers cut workers’ hours, rather than making layoffs. If the company’s workers suffer a 10 percent reduction in hours or wages, the government helps make up the difference.

It works! The workers feel more secure, and more willing to spend, knowing they have a safety net. Businesses don’t need to justify investments or other expenses. And the benefit shows up in the headline numbers. Five years ago, Germany’s unemployment rate was 11.2 percent, versus the United States’ 5.1 percent. Now, the United States’ rate is 9.6 percent and Germany’s is 7.2 percent — even though, GDP-wise, the German recession was worse.

A report released this week by the Gerson Lehrman Group compares the two countries’ response to the recession in more detail.

During the recession, Germany continued a complex set of labor reforms called the Hartz Reforms, cutting some payroll taxes, deregulating labor markets, reducing the length and size of unemployment benefits, and paying employers to keep underutilized workers. In brief, German laws were changed to give employers strong incentives to retain existing workers and hire new ones despite economic hard times. And German laws gave workers every incentive to find work rather than remain unemployed.

Congress did the opposite. It gave workers every incentive to remain unemployed by granting the unemployed longer benefits (up to 99 weeks, in some cases). It also discouraged employers from retaining existing workers or hiring new ones by raising the minimum wage over a three-year period, and announcing future mandates on employers with the new health care and financial regulation laws. Although payroll tax cuts were proposed, they were never implemented.

The contrast between unemployment rates and labor force participation rates in Germany and the United States is stark. Since 2007, unemployment has risen in America and declined in Germany. At the same time, the percentage of people participating in the labor force has declined in America and risen in Germany.

I think this overstates the effect of the rapid expansion of unemployment benefits on the U.S. unemployment rate, and elides some other important differences between the U.S. and German economies. But I agree that there were and are better ways to help the country’s 14.9 million idled workers — particularly as economists forecast the unemployment rate will start rising again this fall.

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