Encouraging Work Sharing to Reduce Unemployment

During the Great Recession, millions of Americans lost their jobs as employers downsized in response to falling demand. A substantial body of research implies that these job losses can lead to significant and persistent problems for affected workers, including lengthy periods of unemployment, sustained earnings losses, serious health problems, and other adverse outcomes (see, for example, Black, Devereux, and Salvanes 2012; Davis and von Wachter 2011; Jacobson, LaLonde, and Sullivan 1993; Stevens 1997; Sullivan and von Wachter 2009; von Wachter, Song, and Manchester 2011). Furthermore, the adverse impacts of job loss may extend to future generations: there is growing evidence that job loss for a parent can lead to lower educational attainment and lower lifetime earnings among their children (see, for example, Hilger 2013; Oreopoulus, Page, and Stevens 2008).

Recent public debate about the problem of unemployment— and especially long-term unemployment—has focused to a great extent on providing extended unemployment insurance (UI) benefits to support family incomes following a job loss. Strategies for preventing layoffs have not received comparable attention in the United States. By comparison, many other developed countries have incorporated work sharing into their UI systems, permitting the payment of prorated benefits to workers who are kept on the job with reduced hours because of slack demand.

If work sharing was more accessible in the United States, more employers might be encouraged to reduce work hours during periods of slack demand rather than lay people off. Instead of letting twenty full-time workers go, for example, a company could achieve an equivalent reduction in force by reducing the hours of 100 employees by 20 percent. Work sharing should be particularly attractive when employers expect the reduction in the demand for their products or services to be temporary, as is often the case during a recession. By avoiding layoffs, employers can retain valued employees and avoid screening, hiring, and training costs when the economy improves and they want to hire more workers. By adopting work sharing, employers also may be able to avoid the adverse effects that layoffs have on employee morale and productivity.

Work sharing has been credited with substantially reducing the number of layoffs and mitigating unemployment during the recent recession in several other countries. In contrast, during the Great Recession only seventeen U.S. states offered a formal work-sharing option; even where available, employer use of this option was very low. The success of work sharing in other countries and the lingering impacts of the recession on the U.S. labor market have spurred growing interest in work sharing in this country.

The Middle Class Tax Relief and Job Creation Act of 2012 is best known for extending the payroll tax cut originally introduced in 2011 and authorizing an extension of emergency UI compensation. But the Act also included several provisions designed to encourage wider adoption and greater use of work-sharing programs. Since the recession, an additional nine states and the District of Columbia have incorporated work-share programs into their UI systems. While the 2012 legislation constitutes an important first step, it does not go far enough. We propose that the federal government take additional actions to encourage the use of work sharing as an alternative to layoffs during future U.S. recessions.