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Economic Policy and Unemployment: The Power of Stupidity

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Image: Dean Baker*This article originally appeared in CEPR on March 1, 2010. Reprinted with permission.

The housing bubble and subsequent crash were the result of extreme incompetence on the part of the country’s top economic policymakers. Somehow these people could not see, or did not care about, the dangers of an $8 trillion housing bubble.

Unfortunately, economic policymaking is not like most jobs where workers get fired when they make serious mistakes. In economics, they just keep getting promoted. Therefore, the people who sank the economy are for the most part the same group of people still designing policy today. Now this group of incompetent economists is telling the rest of us that we are going to have to endure five more years of high unemployment.

However, the rest of the country should not be forced to suffer even more just because those determining economic policy cannot do their jobs. We know how to get the unemployment rate down. Keynes taught us more than 70 years ago that we just have to spend money to eliminate mass unemployment. People work for money, if the government spends, people will work. It’s pretty straightforward.

But, the deficit hawks seems to have largely closed this route. Members of Congress somehow think that they are helping our children by putting their parents out of work.

Fortunately, we can even find a way to create jobs that can keep the deficit hawks happy. It’s called “work-sharing.” The basic point is so simple that even an economist can understand it.

Instead of paying workers to be unemployed – in the form of unemployment benefits – we pay workers to stay employed, but work fewer hours. In effect, to avoid one worker from being laid off, several workers put in somewhat less time on the job and take a small cut in pay. Germany and the Netherlands have used this path to keep their unemployment rates from rising even though they have experienced steeper downturns than the United States.

The way the system works in Germany, a firm will cut back the hours of its workers by 20 percent. The government then replaces 60 percent of the lost pay (12 percent of total pay). The firm is expected to kick in 20 percent of the lost pay (4 percent of total pay) and the worker ends up taking home 4 percent less pay.

In this scenario the worker ends up working 20 percent fewer hours for 4 percent less pay. This can mean, for example, that the worker ends up working a four-day week instead of a five-day week. Given the savings on work-related expenses, like transportation and childcare, most workers would almost certainly end up better off under a work-sharing arrangement than they are now.

While the economy is past its period of rapid job loss, a huge number of workers still lose their jobs each month through the economy’s normal job churning. Each month, companies lay off or fire close to 2 million workers. These job losses are largely offset by hiring by other firms, so that the net change in jobs has been a small negative in recent months. However, if we could just reduce the rate of job loss by 10 percent, then it would be equivalent to creating an additional 200,000 jobs a month or 2.4 million jobs a year. This would get us back to full employment in two years, rather than five or six, as is currently projected.

There are other potential benefits from work sharing. The reduction in work time could give companies an opportunity to adopt more family friendly work practices. For example, they could adopt a policy of paid family leave or paid sick days on a trial basis during the downturn.

There also would be environmental benefits to reducing work hours. Suppose everyone worked a four-day week so that we reduced the number of commutes by 20 percent. This would substantially reduce the amount of greenhouse gas emissions associated with getting to and from work. The fact that Europeans tend to work many fewer hours than we do is undoubtedly one of the main reasons that their per person carbon emissions are about half of the U.S. level.

There are already 17 states that have work-sharing programs in place. There are bills in both the House and Senate that would strengthen these programs and give support to other states to set up their own programs. If Congress is serious about addressing unemployment, it will act on these bills.

About the Author: Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of False Profits: Recovering from the Bubble Economy. He also has a blog on the American Prospect, “Beat the Press,” where he discusses the media’s coverage of economic issues.


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