Endgame: crisis & change
Europe’s Solution: Take More Time Off
New York Times, March 29, 2009
While many European companies have long turned to shorter workweeks and mandatory time off in economic downturns, the idea has never really caught on in the United States. Despite reports of unpaid furloughs and wage cuts, American companies continue to rely heavily on layoffs to control labor costs.
Much of this has to do with cultural differences as well as the social safety net that many European governments offer. For American employers, is one approach — layoffs versus shorter workweeks and wage cuts — better for the economy? Could it be true — as the Germans argue — that keeping more workers on the job is a good way to stimulate the economy in a recession?
* Corinne Maier, author
* Heather Boushey, economist
* Susan Neiman, director of the Einstein Forum
* Truman Bewley, professor of economics
* William Drozdiak, American Council on Germany
* Dean Baker, Center for Economic and Policy Research
Recession Fighting the French Way
Corinne Maier is the author of "Bonjour Laziness" and "No Kids: 40 Good Reasons Not to Have Children." This article was translated by The Times from the French.
France has the ultimate weapon for fighting the economic crisis: free time. Long live the 35-hour week, though it was once sentenced to the scaffold by President Nicolas Sarkozy. The law reducing work hours, known in French as R.T.T., today is like a shock absorber of the crisis. Businesses in trouble are using the R.T.T. regime to avoid layoffs.
The proof? Last Christmas, none of my salaried friends in Paris were working. Several of them told me, "My company pushed us to take the R.T.T. between Christmas and New Year’s Day." Translation: since there’s no work, mandatory days off.
So what, then, of that favored slogan of President Sarkozy, "Work more to earn more"? Mr. Sarkozy himself still seems to believe in it, though perhaps he is the only person who does, and the 2007 changes to the R.T.T. law that reduced overtime costs for business remain in effect. But considering the current recession, it’s unlikely that many businesses will need to take advantage of them.
Indeed, the Japanese employers’ organization is studying R.T.T. as a solution to the crisis in that country. I wonder, though, if the French model can work everywhere else: What would Americans do with close to two months of vacation a year? When you’re not used to it, it can seem like a LOT of free time. But perhaps that is indeed the future of capitalism. My American friends, make an effort to be lazy!
How to Help the Economy, and Families
Heather Boushey is a senior economist with the Center for American Progress.
Firms in the United States should consider cutting back in this recession by introducing shorter workweeks, flexible schedules and more time off, rather than laying off workers. These kinds of policies could help to keep consumption more stable than increased layoffs, as well as being potentially more popular with workers.
Prior to the recession, workers often reported that they would like to cut back on hours to spend more time with their family or focus on nonwork activities, but many employers did not provide them with this kind of flexibility. While cutbacks that lead to smaller paychecks may not be ideal, some families appreciate the extra time while still having a job. However, for many, fewer hours a week will pose an economic hardship. Families’ budgets are usually based on the amount of workers’ paychecks, and people don’t typically assume those paychecks will become smaller over time. Families will certainly have to cut back.
A complete layoff — especially in this economy where there are more than four unemployed workers for each job available — could be devastating to a family’s economic well-being. On top of lost income, since most workers get their health insurance from their employer, a layoff can mean the loss of access to health care for the worker and quite possibly their entire family.
But the implications of the question of layoffs versus cutting hours or increased time off go beyond individual families. In the United States, 6 in 10 workers who have become unemployed over the last 12 months have not received any unemployment benefits. Thus, more than one out of every two unemployed workers ends up having to severely curtail their consumption, which pulls down economic growth since 70 percent of the United States economy is based on consumer spending. Keeping more people employed, even at shorter hours, helps maintain consumer spending, which in turn, helps to keep the overall economy going.
It remains to be seen whether large numbers of firms adopt shorter workweeks and more time off or whether this trend will endure once the recession is over. If done right – that is, in a way that works for employees, as well and employers – greater workplace flexibility may help families struggling to balance work and family responsibilities. It could also add a little boost to our economy just when we need it.
Germans Have Rights, Not ‘Benefits’
Susan Neiman, the director of the Einstein Forum in Germany, is the author of "Moral Clarity: A Guide for Grown-Up Idealists."
The specter of unemployment creates special fears in Germany. They are not fears of mass homelessness or hunger: unemployed German workers can count on the state to pay their rent, health insurance and other basic living costs. Add a system where college education is virtually free, and you have a set of safety nets that any American worker must envy.
Why will German governments do anything to avoid unemployment? The belief that unemployment was responsible for the Nazis sits deep in German consciousness. As former German foreign minister Joschka Fischer once pointed out, unemployment in the United States didn’t lead to fascism but to the New Deal. It’s harder to acknowledge that the greatest crime in German history was produced by individual human beings who could have acted differently than to view it as a product of blind economic forces.
But if German unemployment policies rest on dubious historical background, the policies themselves are right. Even where unemployment doesn’t lead to homelessness (much less fascism) it does lead to humiliation and misery.
And so companies here are choosing the option of "Kurzarbeit" — short work — to shorten workers’ hours rather than laying them off. For up to 18 months, the government provides partial supplements to their salaries. Thus workers are spared unemployment, employers need not train new workers when the economy improves and the government need not worry about instability.
It’s an option that should be chosen by individual American companies wherever possible. To implement it nationally the United States would have to learn from a host of European social policies. The European system, in which health care, pensions and vacations are not called "benefits" but considered to be rights, is based on fundamentally different assumptions about humanity than the system Americans have.
You say it’s unsustainable? Despite those assumptions, Germany had the world’s third-largest economy until edged out by China last year. While taking first steps — like reforming the health care system — to ease the immediate pain of the financial crisis, long-term American policy should pay attention to the drastically different options its closest allies provide their citizens. If politics is the art of the possible, this year has taught us that more things are possible than we ever imagined.
Why Employers Prefer Layoffs
Truman Bewley is the Alfred C. Cowles professor of economics at Yale University.
There are numerous trade-offs in the choice between layoffs and work-sharing, the term for reduced hours or rotating furloughs. From the employer’s point of view, layoffs have the advantage that they generally save much more money than work-sharing, because layoffs eliminate the fixed expenses of employment, like benefits, administrative costs and the costs of maintaining a place for people to work. In some companies, these fixed costs are substantial. But work-sharing has the disadvantage that it can hurt workers’ morale by reducing incomes.
The impact of reduced incomes is not great when temporary, but they can have a serious effect on morale and productivity if prolonged. In Europe, the impact on incomes is softened by generous social insurance.
Employers care a great deal about morale because of its impact on productivity, and the ability to attract and retain employees, which becomes especially important when the economy revives. Layoffs, of course, hurt those who are let go, but have the advantage that those who are harmed are not at the workplace.
A disadvantage of layoffs is that those let go may be lost if they find other jobs elsewhere before being recalled. This consideration is extremely important for employees with skills in scarce supply, and for this reason work-sharing in the United States seems to be most common at firms dependent on highly skilled workers.
A disadvantage of work-sharing is that employees are likely to feel that they do not have enough to do and so instinctively slow down and may develop bad work habits.
Companies often find that their workers are most productive when high workloads give rise to a sense of urgency. Layoffs can create such a sense, if carried so far that those who remain have a hard time keeping up with what needs to be done.
Businesspeople tend to believe that the best way to handle a business downturn is to maintain a core group of key employees, encourage its morale by giving raises and laying off so many employees that those who remain have a little too much to do.
This picture is grim but not cynical. There are no comfortable ways to deal with business downturns.
A Culture of Shared Sacrifice
William Drozdiak is the president of the American Council on Germany.
Germans are justifiably proud of what they call their social market economy. There is generally a tighter bond between employees and the company because of a shared commitment not just to profits but also to a sense of community, or "Gemeinschaft." Thus, workers are quite willing to sacrifice part of their paycheck or their workweek to sustain fellow employees on the payroll.
The availability of universal health care, largely funded by national governments, means that losing a job in Europe does not mean risking one’s health.
Critics of the German system — and other European systems — say it undermines entrepreneurial spirit and perpetuates inefficient companies that should be allowed to perish so that free market forces can be allowed to purge the weak through "creative destruction." But Germans argue that their system tames the worst abuses of raw capitalism and acts in a more humane way that alleviates the suffering of employees during a downturn, if only by keeping them gainfully employed so they can continue to spend money as consumers. The state encourages such flexibility since it wants to avoid the heavy burden of higher unemployment benefits, which can last up to five years.
While unemployment rates in Germany and other European countries are higher than in the United States, Europe’s tradition of providing a comfortable social safety net cushions laid-off workers against the most painful consequences of long-term unemployment. In addition, the availability of universal health care, largely funded by national governments, means that losing a job in Europe does not mean risking one’s health.
In the United States, the fact that health care is largely provided by the employer is a risk for the worker as well as the company, which must pay an extra premium and incur costs not shared by their competitors in Europe and Japan. For that reason alone, many business executives in the United States think the time has come for America to emulate Europe by letting government take full responsibility in providing health care for all.
A Stimulus for Working Fewer Hours
Dean Baker is an economist and co-director of the Center for Economic and Policy Research.
More than 12 million workers in the United States are currently unemployed, with the number rising rapidly. The problem with the economy is that we can produce more goods and services than is being demanded. The way we generally deal with lack of demand is to lay people off, leaving a relatively small segment of the work force (the unemployed) to bear the pain of our economic problems.
An alternative would be to have everyone share in the adjustment to excess supply by reducing work hours. Fewer work hours would mean roughly proportionate reductions in pay, but there would be the offsetting benefit of more leisure time. Workers would have more time to spend with their families or in nonwork activities. This would bring us more in line with the rest of the world, where the standard workweek and year is considerably shorter.
Shorter hours can also be associated with more flexibility in hours making the workplace more family friendly. It may also be more environmentally friendly by reducing the congestion at rush hours and perhaps leading companies to reduce the number of commutes by allowing four day workweeks.
One reason that firms are reluctant to go the route of shorter hours is that many costs, particularly health care insurance, are typically paid per worker rather than per hour. This gives firms a strong incentive to maximize the amount of work they get out of each worker. Health care reform is an obvious long-term answer to this problem but in the short term it suggests that the government can play a useful role by providing an offsetting incentive to reduce work hours.
This can be an important part of a new stimulus package. Effectively, the government would be paying people to work less. This can be done with modest employer tax credits, for example, the government could give a credit of up to $2,500 or 10 percent of a worker’s time to cover paid time off for workers. (This credit would cover 10 percent of the pay of someone earning $25,000 a year or less.) The paid time off can take the form of paid family leave, paid sick days, paid vacations, shorter standard workweek, or some combination.
The arithmetic on this is very straightforward. Suppose employers of 50 million workers reduced work time by an average of 5 percent. Demand would be little changed, since workers are still getting paid almost the same in spite of their shorter hours. With these workers putting in 5 percent fewer hours, and demand unchanged, employers should want to hire (or not lay off) roughly 5 percent more workers, or 2.5 million workers. (The impact on total employment is the same whether this tax credit averts layoffs or leads to new hires.)
This would be a quick bureaucracy-free way to reduce the unemployment rate at a relatively low cost (a $2,500 credit for 50 million workers would cost $125 billion a year). In addition to the short-term benefit, there could be a long-term benefit in that workers and employers may like the new work arrangements and keep them in place after the tax credit is removed.
At this point, few people in Congress are actively discussing further stimulus. Of course, Congress has underestimated the severity of this downturn all along, passing a stimulus package in 2008 that everyone now concedes was inadequate. This will soon be the case with the more recent package. When Congress again realizes its mistake, there may be interest in a pay for play tax credit as the quickest and best way to get the economy back to full employment.
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