The German plan to reduce U.S. unemployment

(SOURCE: EUROSTAT)

Germany has kept its employment levels astoundingly high throughout the global recession. How high? In July, the country’s unemployment rate was just 6.1 percent, a full two points lower than it was in January 2008. Many credit labor reforms that allow employers to use government subsidies to keep more workers on the job, temporarily reducing hours while using public funds to make up some of the difference. Known as “short-time work” or “work-sharing,” the scheme aims to spread the pain of recession around rather than forcing a handful to bear the brunt of the suffering.

By many accounts, work-sharing appears to have been successful, and a growing number of countries — primarily in Europe, as well as Japan — have actively embraced it. “European countries with widespread and generous short-time compensation experienced a smaller rise in unemployment in the recent recession than those without,” write economists Pierre Cahuc and Stephane Carcillo for VoxEU. They explain that a one-percentage-point increase in short-time work correlates with a one-point decrease in unemployment.

Even as German firms began to suffer from a severe decline in production, many of them “chose to keep rather than shed workers,” keeping the employment rate high and the “German miracle” alive, explain George Washington University’s Alexander Reisenbichler and Kimberly J. Morgan.

President Obama now seems eager to follow Germany’s lead. The American Jobs Act contains a provision that would encourage employers to utilize work-sharing instead of layoffs, allowing workers whose hours have been reduced to receive unemployment benefits. Liberal economists such as Dean Baker have also been vocal in urging expansion of the program — which more than 20 states have already adopted in some form — calling it the “quick route back to full employment.”



Others have warned, however, that work-sharing is not a fail-proof panacea, arguing that the policy could dampen productivity and efficient labor-force reallocation. The scheme has a positive effect on full-time employment but doesn’t help temporary employment, which could make it harder for those who are unemployed to reenter the workplace, Cahuc and Carcillo argue: “The benefits of insiders can be at the expense of the outsiders whose entry into employment is made even more difficult.” And there’s some data that could back up this claim. Though its overall employment rate is low, Germany’s long-term unemployed make up a higher percentage of total unemployment than in many comparable nations, including the United States.

What’s more, work-sharing probably would have had the most impact in the United States had it been implemented before companies made huge layoffs, not afterward. The program could deter firms from making future layoffs, but that doesn’t mean they would be motivated to hire additional workers. But given the country’s dismal economic outlook, those who have held on to their jobs may be grateful for extra protection where they can get it.

Source: WonkBlog, Sarah Kliff