Home > The Economics Profession, The Economy > Economic Policy and Unemployment: The Power of Stupidity

Economic Policy and Unemployment: The Power of Stupidity

from Dean Baker

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.

www.cepr.net

  1. March 3, 2010 at 2:47 pm

    I so agree with your analysis. Work-sharing is the way to go. Not only, as you mentioned, does it reduce work-related costs (transportation, child care), it also gives people more time to do something else than just work, like start a hobby, get involved in social activities, go to the gym, relax at home, etc. The big picture? Happier workers. And I’m only talking about the personal benefits. It would also force companies to be more flexible and ultimately more socially conscious.

  2. minervaria
    March 3, 2010 at 3:47 pm

    I do agree as well. Economy must be more social, companies do have social responsibilities.
    Nevertheless I’m not so sure work-sharing would contribute to environmental benefits in a large way. Traffic on motorways in Europe in the weekend is steadily growing. Sometimes you can hardly see the difference with traffic on working days.
    I think we all should learn to be happy with less.

  3. originalsandwichman
    March 4, 2010 at 5:11 am

    I’m happy to note that Robert Pollin has now publicly endorsed work-sharing as part of his proposal, in The Nation this week, for creating “18 million new jobs by 2012” (presumably he means by the end of 2012).

  4. Steve
    March 10, 2010 at 3:30 am

    What a ridiculous article! If government spending could create jobs then where are all the jobs created from the US government’s 23 TRILLION in bailouts and guarantees! Keynes was right about stimulation by governments offsetting deleveraging from the private sector, but even he acknowledged that this can only work to a limited degree. When the economy is falsely inflated by easy and cheap credit to the point where it is so over leveraged that interest costs alone are almost impossible to be met from the production in the REAL economy, then a drop in living standards in inevitable. This is what is happening now. ‘Fixes’ like job sharing, while they have some appeal only work to spread the decline in living standards more evenly. It does nothing to increase the production and subsequent living standards in the real economy. In the case of the German example, the end result is people working 20 percent less for almost the same money. This means that costs go up, causing real output to FALL, not increase! It doesn’t matter who foots the bill, there is an increase in debt somewhere to fund the 16%, with no additional productivity to pay for it. This can only mean a 16% drop in living standards in the long run, plus interest. In short, a less than zero-sum-gain.

    This is so simple even someone like Dean Baker should be able to understand it.

    By definition, ECONOMY is not about money and ‘jobs’, it is about real people making real things that people both need and can afford, and offering services that assist in bringing increased efficiency to this process. ‘Jobs’ that do not do either of these are a drain on the economy, not a contributor to it.

    Unfortunately the massive consequences of runaway debt over the past 40 years are barely considered by either economists or simplistic commentators. So everyone wants the ‘tooth fairy’ to come along and tip some free money into the economy so nobody has to pay for the irresponsible levels of debt that MUST reduce living standards in order to be paid.

    Governments are not the ‘tooth fairy’.

    • Alice
      March 11, 2010 at 11:36 am

      Steve – you obviously cant discern a fiscal stimulus from a monetary bailout. The former was dwarfed by the latter in the recent GFC yet the former had more effect and didnt just go towards reinforcing obscene CEO and CFO bonuses in the private sector banks.

      Governments, if they have ther priorities right are not there to be the “tooth fairy.” It was the Wall St banks that benefitted from the tooth fairy in case you didnt notice…those who should have collapsed from the weight of their own risks.

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