As the unemployment rate continues to increase with little sign of recovery on the horizon, a question arises as to just how best to meet the needs of workers and those out of work. We have heard that the federal stimulus package will create jobs, or if it doesn’t create them it will at least save them. It is indeed debatable as to whether public policy, especially spending programs, can really affect the business cycle. Joseph Schumpeter once talked about “creative destruction” whereby the new and technologically advanced would replace the old and obsolete. The implication, of course, was that a capitalist economy operates in cycles and the processes of unemployment due to new technologies and re-employment due to new job creation are natural processes. Still, there is great suffering that occurs through this process, and the greatest role for public policy may be to alleviate that suffering. Whether or not money spent on job creation is a wise choice is certainly open to discussion, but perhaps more attention should be focused on just how jobs can be retained.

Instead of spending huge sums of money on bailouts — especially bailouts requiring companies receiving money to restructure in such a way that effectively results in job loss —  and other stimulus types of packages, money should be spent on ways intended to prevent layoff. Arguably, many companies may use the cover of recession to restructure as a means of saving money, in which case these jobs will not come back. But many more companies might benefit from policies that would enable them to retain their workforces during economic downturns. The easiest way to accomplish this might be to reform the Unemployment Insurance (UI) system to allow for the payment of short-term compensation (STC) in lieu of traditional UI benefits to laid off workers.

To maintain the work force through a program of short-term compensation payments would represent a major departure from the current UI system that grew out of the Great Depression during the 1930s when millions of workers found themselves out of work. UI was more specifically a response to the business cycle inherent to industrial production. Downturns in the business cycle would naturally result in layoff. And yet, if it was cyclical, workers could expect to be recalled back to their former employers once the business cycle picked up again. Therefore, unless a system was in place to provide wage replacement for laid off workers during the down cycles, there might not have been an available pool of workers to return upon recall. UI has historically served two principal functions. First, it has offered laid-off workers critical income protection during temporary spells of joblessness. And second, it has fulfilled a macroeconomic function to the extent that it replaces lost wages and thus enables workers to continue having purchasing power in the economy, especially during times of recession. In an industrial economy where it is assumed that workers might be recalled during an upturn in the business cycle, UI allows workers to collect insurance during the downturn. It also assumes that greater efficiency is to be achieved if workers can have the time to engage in the type of job search that will better match their skills to the demands of the economy.

The fundamental assumption of this model is workers will be laid off. In fact, it encourages managers to lay their workers off, which in turn effectively raises the cost of human capital investment. Would the investment into the prevention of layoffs not achieve greater efficiency through the maintenance of a ready workforce and the cost savings associated with not having to engage in job search and training? Many European countries, as well as Canada and Japan, have experimented with work sharing and short-term compensation.. The typical UI system with work sharing routinely pays short-term compensation (STC) to those workers on reduced hours. Instead of laying off workers, employers can simply reduce work weeks, with their employees drawing partial benefits. The effect of STC, then, is to encourage work sharing rather than layoff, which in turn makes it less costly to invest in human capital in the long-run.

In the U.S. the state of Maryland has a voluntary work sharing program. Its rationale is that work sharing is beneficial to both employees and employers. The state’s Department of Labor website states that “Using Work Sharing, an employer can maintain high productivity and quality because the existing trained work force remains in place. When business improves, the work force is intact, ready to go, and employers are able to avoid the time and expense of rehiring and retraining. Work Sharing enables employers to keep productivity and employee morale high because workers avoid the insecurity, unrest, and “bumping” characteristics of layoffs. Also, firms can maintain affirmative action gains since with Work Sharing they can avoid “last hired-first fired” layoffs.” Moreover, because employees are able to maintain their jobs, they are able to continue pursuing opportunities for advancement and skill enhancement. The effect is no doubt to ensure a strategic alignment between human capital and human resource management.

Work sharing, however, would serve to maintain the workforce, thereby making in more  likely that employers would invest in human capital development. A corporate bailout to a large extent does follow a trickle-down approach: give money to managers, they keep their businesses going, they retain most of their workforce, and maybe begin to hire again when they can. Work sharing, on the other hand, might represent more of a grass-roots type of community investment into human capital. There is no question that health care reform, as I have argued in a previous post, would make the economy more competitive by alleviating business of the burden of rising healthcare costs. But if we really believe in investing in workers, we need to think of other ways by which we can strengthen the social safety net.