PANDEMIC | Avoiding Layoffs–Wage- or Work-Sharing

Automaker Shutdowns Raise Specter of
Mass Layoffs. How to Head Them Off?

March 19, 2020–The economic disaster threatened by the social distancing required by the COVID-19 pandemic could be exacerbated by widespread corporate layoffs. 

Yesterday, Ford Motor, General Motors and Fiat Chrysler Automobiles agreed to UAW demands to shut down North American plants to prevent the spread of the virus. They  suspended factory operations through the end of March. The closing of auto factories by U.S. automakers could be a sign of what is to come.

To reduce this threat of mass layoffs in the face of the pandemic, the United States might consider a program that has had some success in Europe. 

That is, to enact a Federal and State Wage Sharing program, by which the Federal Government pays for, say, 30 percent of worker salaries during the active period of the coronavirus. State governments could opt to pay for another 30 percent.

President Obama looked at this idea in 2014 but did not implement it. The U.S. Unemployment Insurance system is based on a person being totally laid off. The state unemployment insurance systems provides partial replacement income to such workers. The Austrian and German "short-time working" (Kurzarbeit) programs provide government assistance to workers to allow private employers in a recession to offer their employees a reduction in working hours and pay, in lieu of layoffs.

"Ich war dabei" means
"I was there."

The idea is that instead of laying off 30 percent of workers because orders are not coming in, all workers are retained and their hours are reduced instead of the headcount. The government wishes to avoid the cascading effect of layoffs, as workers without incomes stop spending money in their communities and may lose their work habits and skills, making it harder for companies to start up again in good times.  

The governments support this program by making up some of the difference in salary for the workers, with the possibility of providing full pay for fewer hours if employees are enrolled in training programs during their extra time off. The program offers these advantages:

• The employer is better able to pursue a no-layoff policy by having to pay workers less.
• For example, if the company was planning to lay off 30 percent of the workforce, the same saving might be achieved by shaving 30 percent off the workweek of 100 percent of employees.
• Employees can use the time off to take training, take a vacation, or even pursue a long-postponed personal hobby or startup.
• The government program makes up most or all of the pay loss by the workers. They are paid to stay home.
• This benefits the country by sustaining the incomes of the workers, so that they don't have to cut back spending in their communities.
• As a temporary measure, it benefits the business because it eliminates the cost of recruiting new workers when business picks up again.
• It increases the morale and loyalty of workers to the company, and they are less likely to move away or apply to a competitor or change their occupation.
• By keeping employees on the payroll, the skills of workers are maintained.  

The Austrian short-time program is arranged between the national Chamber of Commerce and the labor unions. They negotiate the types of staff to be covered, the maximum period, conditions for layoffs and the nature of any training programs that will be part of the program.

The German government's program in 2009 budgeted €5.1 billion to replace some of the lost income of over 1.4 million workers, i.e., approximately €3,600 per worker. The program was cited that year in a report by the Organisation for Economic Co-operation and Development (OECD) report, which said that the short-work program had saved nearly 500,000 jobs during the recession.

To recap, the advantages of the program are that it maintains worker skills and buys time for management to determine eventually (if the hard times continue) how many workers they can keep on their payrolls. It encourages managers to decide in favor of retaining workers, and thereby reduces the threat of widespread layoffs. For the duration of the COVID-19 disease, companies could envision a no-layoff policy.  This maintains the stability of corporate paychecks, community incomes and tax payments. By keeping together skilled work groups, it makes recovery easier. 

The program does not solve all the problems presented by the COVID-19 virus, of course. It does not address the problem of maintaining the incomes of those without jobs. It costs money, even if it is limited to the period of the COVID-19 disease. It is only for a short-term recession or a pandemic or a similar catastrophe. It would probably best be administered through state unemployment insurance programs.

Governor Cuomo has said that the numbers of infected people will peak in six weeks, based on the progress of the virus in other countries. So in a best-case scenario, payments in a wage-sharing program would continue for about 10 weeks. If recovery from the disease did not start by May or early June, the program might have to be extended or renewed.

Paul Krugman recommended the Kurzarbeit concept in 2010, noting that Germany's growth rate in GDP was slower than that of the United States, but its employment rate did not fall as much. The employment rate, or employment-to-population ratio, is a more reliable number than unemployment because it doesn't depend on subjective phone surveys of each household member's intent to find a job.

I wrote about the Short-Time Working program (Kurzarbeit) in March 2014. This "Wage-Sharing" proposal is similar to the "Work-Sharing" program outlined in a June 2014 Brookings report, Encouraging Work Sharing to Reduce Unemployment, by Katharine G. Abraham (University of Maryland) and Susan N. Houseman (Upjohn Employment Institute). Wage-sharing looks at the spending side for corporations, providing government subsidies for the wages. Work-sharing looks at the arrangement from the perspective of the employees, i.e., sharing the cuts in factory work among all the workers. Two sides of the same coin. 

Abraham and Houseman proposed that the federal government subsidize state work-sharing payments during economic downturns. They suggested making work sharing a requirement for state unemployment insurance systems. They would modify federal requirements for state work-sharing plans that discourage employer participation. They also recommend providing states with adequate funding to administer work-sharing programs. Reportedly more than half of the states have work-sharing plans on the books but they lack adequate federal funding or interest among companies.

Outlook for the NYC Economy

The New York City Independent Budget Office predicts there will be 33,000 fewer NYC bankers and financiers by mid-2009. These losses come on top of what Bloomberg news estimates as 83,000 financial-company layoffs worldwide since July 2007. NYC alone has lost about 10,000 financial-service job losses August 2007, 3.5 percent, according to the BLS. Bear Stearns is laying off 9,159 people, two-thirds of its pre-demise total. Citigroup is layoff 15,900 workers worldwide, a 4 percent reduction. A table of cuts from the NY Post is here. Comment by CityEconomist: Wall Street may seem remote from those who don't work there, but spending and taxes by Wall Streeters are crucial for the NYC economy. The dependence on Wall Street has periodically been bemoaned, but as Wall Street productivity increased, revenues and income (including bonuses) per Wall Street worker have been rising steadily with other industries not replacing these jobs and manufacturing jobs that have also been declining. Fortunately, health-care jobs were reliably growing and now we have more tourism and restaurant jobs. But many of these jobs do not pay well. So do not ask for whom on Wall Street the bell tolls - it tolls for everyone with a stake in New York City and that's a large number of people.

U.S. MISERY INDEX | 8.3 Percent

Fed Chairman Ben Benanke has warned Congress both about the possibility of higher inflation and a recession in the near future. Higher inflation would arise in part from costlier commodities imports (reflecting the declining value of the dollar and the higher cost of oil). A recession could be induced by falling housing prices and the impact of foreclosures and writeoffs on credit markets.

The danger of a combined higher inflation and unemployment is stagflation, measured by the so-called "misery index", which was at its highest in June 1980 at 22 percent and at its lowest in July 1953 at 3 percent. In October, U.S. inflation was 3.6 percent at a seasonally adjusted annual rate (SAAR). The unemployment rate was unchanged at 4.7 percent. The misery index was therefore 8.3 percent.

In New York City, the unemployment rate rose in October to 5.3 percent, seasonally adjusted, an increase from 5.1 percent in September 2007. With NYC inflation at 3.1 percent year-over- year, its misery index is a relatively low 8.4 percent, just 0.1 of a percentage point higher than the nation's.

NYC is still in the early stages of a housing downturn and financial sector mass layoffs. BLS reports that third-quarter "layoffs in the finance sector were primarily in the credit intermediation and related activities industry, which reported its highest number of events and separations in program history.”