Worksharing and Long-Term Unemployment

April 7, 2014

The Great Recession was especially deep and especially long. The sustained departure of output from its trend path was accompanied by a large drop in employment, which stayed low relative to trend for an extended period as well. As this occurred, the percentage of workers who were long-term unemployed increased sharply. Even as the U.S. economy recovers, the painful legacy of the Great Recession lives on as these long-term unemployed workers continue to struggle to reconnect to society, say Kevin A. Hassett and Michael R. Strain of the American Enterprise Institute.

Knowing this, policymakers and economists must consider whether different policies could have mitigated large employment losses and the high incidence of long-term unemployment. Hassett and Strain believe that worksharing may be such a policy.

  • Under worksharing, a firm can reduce the hours of its workforce in lieu of a layoff, and workers whose hours have been reduced are eligible for a prorated unemployment insurance (UI) benefit.
  • In this way, a firm can weather a temporary lull in demand by reducing its payroll costs without laying off a large number of workers.

Hassett and Strain make three points.

  • First, the impact of long-term unemployment on the lives of those affected is so significantly negative that addressing the issue should be a top priority for policymakers.
  • Second, extended unemployment insurance benefits are an insufficient way to deal with unemployment and additional policies are needed.
  • Finally, an alternative reform of unemployment insurance could reduce the risk that the next recession might lead to another surge in long-term unemployment, help keep some of the millions of workers who are laid off every year in their jobs, and in so doing help avoid the problem of "hysteresis" associated with long-term unemployment.

Source: Kevin A. Hassett and Michael R. Strain, "Worksharing and Long-Term Unemployment," American Enterprise Institute, April 2, 2014.

 

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