by Kevin A. Hassett, Michael R. Strain
American Enterprise Institute
April 07, 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. In light of this, policymakers and economists must ask whether smart policy could have mitigated large employment losses and the high incidence of long-term unemployment. We believe that the answer is yes and that work-sharing is such a policy. Under work-sharing, 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 large number of workers.