Your Job or Your Hours

Chaquenya JohnsonBy Chaquenya Johnson, Intern

When the economy is hit by a sudden drop in demand, employers typically react by cutting employment or hours of work — sometimes both.

In a recent paper, John Schmitt of the Center for Economic and Policy Research reviews the experiences of Denmark and Germany in the Great Recession and finds that, while both countries experienced a comparable decline in their economies, the outcomes for employment were very different.

German employers absorbed the decline in demand entirely with reductions in employee hours of work. As a result, unemployment actually fell over the course of the Great Recession, even as Germany’s Gross Domestic Product (GDP) declined.

The German approach is partly attributable to negotiations with unions; union coverage in Germany is 63%. But German employers also took this path because of a program called “short work,” a version of what we know in the U.S. as Shared Work.

Under these programs, an employer facing a decline in demand can cut hours of work rather than jobs. Employees who take a pay cut because they are working fewer hours have their pay supplemented with unemployment insurance benefits.

Employers get the benefit of having workers available when demand returns, which saves them training and hiring costs. Workers get unemployment benefits, while keeping their job and their skills and maintaining ties to the workforce.

In Denmark, employers reacted to the Great Recession in much the same way as they have in the U.S.: they cut mostly jobs.

Labor market policy in Denmark is often referred to as “flexicurity,” where workers are easily fired and hired, but they benefit from high wages, high union density and a generous safety net. As Schmitt argues, up to the Great Recession Denmark was lauded as a great success with a dynamic economy and relatively low unemployment.

Workers were largely shielded from the harsh, sometimes debilitating impacts of job loss by an array of income security, training and jobs programs. These programs also provide assistance to match jobless workers with employers that are hiring. Expressed as a percentage of GDP, Denmark spends 12 times more than the U.S. and five times more than Germany on these kinds of programs.

Despite these programs, the flexibility of Denmark’s labor market meant that — just as in the U.S. — most of the decline in demand after the Great Recession was absorbed by job losses. To be sure, unemployed workers in Denmark enjoy more income support and assistance than American workers, but when faced with a sharp reduction in demand, both countries are left with high unemployment. 

U.S. workers could certainly benefit from the many programs available to workers in Denmark. But Denmark’s experience also makes clear that better funded job training programs are not sufficient to get people back to work when the economy is hit by a large reduction in aggregate demand.

Pennsylvania’s unemployment insurance system has a new shared-work program that gives employers the option of reducing works hours, as opposed to layoffs, when they expect that layoffs will affect at least 10% of their workers. Workers whose hours are cut would then have the unemployment insurance system replace a portion of their lost wages.

When the next recession hits, hopefully some Pennsylvania employers will take advantage of the shared work option, and fewer workers will lose their jobs.

Chaquenya Johnson served as a 2011 summer intern with the Keystone Research Center and Pennsylvania Budget and Policy Center.

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