The payroll tax law's best measure

Tucked in the small print of the payroll tax bill is a work-sharing plan that could save more than a million jobs this year
A factory in Germany
A factory in Germany, where work-sharing has been credited with actually reducing unemployment during the recent recession. Photograph: Sean Gallup/Getty Images

One of the little-noticed items attached to the extension of the payroll tax cut was a provision that would promote work-sharing as part of state unemployment insurance systems. The provision, which is based on a bill introduced in the Senate by Jack Reed and in the House by Rosa DeLuaro, would reimburse states for money spent on work-sharing programs that are part of their unemployment insurance system. It would also provide funds for the states that do not currently have work-sharing systems to establish them.

This provision is a rare victory of bipartisanship and commonsense. The basic logic of work-sharing is straightforward. Under the current system of unemployment insurance, workers who lose their jobs can get roughly half of their pay in benefits. However, if a worker has their hours cut back because of inadequate demand, they don't get in any way compensated for the lost pay. This effectively encourages employers to go the route of layoffs, rather than shortening work hours, since that is the only way that workers can benefit from unemployment insurance.

Work-sharing gets around this asymmetry. It allows workers to be compensated for part of their lost pay when their employer reduces their work hours. This means that if an employer decides to reduce the work hours of 50 workers by 20%, as opposed to laying off 10 workers, the 50 workers can get half of their lost pay (10% of their total pay) covered by unemployment insurance. This means that workers will end up working 20% fewer hours for roughly 10% less pay.

This is an outcome that is likely to better for workers, employers, and the economy as a whole. It is better for workers because it keeps them on the job and in a situation where they can be continually upgrading their skills in accordance with changes in the workplace.

By contrast, workers who are unemployed for long periods of time have great difficulty getting re-employed. Employers are reluctant to hire workers who have been out of the workforce for one to two years or longer. Unfortunately, a large number of workers now fall into this category.

Work-sharing can also be beneficial to employers as many firms that have gone this route have discovered. By keeping workers on the job these firms are able to ramp up production quickly to meet new demand. If they had gone the layoff route, they would be forced to go through a costly and time-consuming process of hiring and training new workers. The expense associated with employee turnover can be considerable, even for the least skilled positions.

Finally, the work-sharing route is by far the better route from the standpoint of the economy and society. It is a personal disaster for workers who end up permanently shut out from the labor force, but it also an enormous loss to the economy and society. We want to take to be able to use the skills that people have developed over a working lifetime, not throw them in the garbage.

And, needless to say, the family of a worker who is unable to find unemployment will also suffer considerable hardship. It is much more difficult to raise children in a situation where a primary breadwinner suffers through a long period of unemployment.

The provision in the tax bill will go far towards promoting the increased use of work-sharing, but there is still a long way to go. At the moment, there are less than 50,000 workers nationwide on work sharing programs. The extent to which this number increases will depend on efforts by states to promote the program and also their willingness to allow employers flexibility in its use.

The potential impact of work-sharing on unemployment is enormous. While the economy as a whole is adding jobs, we still have an enormously high level of churn every month: roughly 4 million workers leave their jobs, with 2 million leaving involuntarily. If the number of people being laid off can be reduced by 5%, this would be equivalent to adding 100,000 additional jobs each month, which translates to 1.2m by the end of a year.

Work-sharing has been used successfully elsewhere. Germany's unemployment is 1.5 percentage points lower today than it was at the start of its recession. This is not due to Germany's growth performance, which actually has been somewhat worse than the US. Rather, the difference is that Germany has been successful in persuading employers to keep workers on the job, even when this has meant a shortening of hours.

We might not have the same success with work-sharing as Germany, but if we can generate 1-2m additional jobs by promoting shorter hours, this would be a really big deal. The bill passed by Congress and signed by President Obama last week is a big step in this direction.