Short‐Time Compensation as a Tool to Mitigate Job Loss? Evidence on the U.S. Experience During the Recent Recession

• Date: 01 October 2014
• DOI: http://doi.org/10.1111/irel.12069
• Author: Katharine G. Abraham,Susan N. Houseman
• Published date: 01 October 2014

Short-Time Compensation as a Tool to Mitigate

Job Loss? Evidence on the U.S. Experience

During the Recent Recession

*

KATHARINE G. ABRAHAM and SUSAN N. HOUSEMAN

During the recent recession only seventeen states offered short-time compensation

(STC)—prorated unemployment benefits for workers whose hours are reduced for

economic reasons. Federal legislation passed in 2012 will encourage the expan-

sion of STC. Exploiting cross-state variation in STC, we present new evidence

indicating that jobs saved during the recession as a consequence of STC may

have been significant in manufacturing, but that the overall scale of the STC pro-

gram was generally too small to have substantially mitigated aggregate job losses

in the seventeen states. Expansion of the program is necessary for STC to be an

effective countercyclical tool in the future.

Introduction

DURING THE RECENT RECESSION,THE UNITED STATES AND OTHER DEVELOPED COUN-

TRIES experienced economic dislocations on a scale not seen in decades.

Between the peak of nonfarm payroll employment in January 2008 and the

trough in February 2010, the United States lost more than 8.7 million jobs, a

drop of 6.3 percent, and the U.S. unemployment rate jumped from a low of 4.4

percent in April 2007 to a high of 10.0 percent in October 2009, with particu-

larly marked increases in the incidence of long-term unemployment.

1

Even four

years after the official end of the recession, neither employment nor unemploy-

ment had returned to pre-recession levels. The severity and persistence of the

*The authors’affiliations are, respectively, University of Maryland, College Park, Maryland. Email:

kabraham@umd.edu; Upjohn Institute for Employment Research, Kalamazoo, Michigan. Email: houseman@

upjohn.org.

JEL: J65, J08, J20.

The authors are grateful to Linda Richer for compiling current information on the provisions of short-time

laws in the United States, Chris O’Leary and Steve Wandner for helpful discussions concerning these laws,

Brian Dahlin for providing unpublished state-level employment and hours data, Scott Gibbons for sharing

data on STC benefit activity by state, and Lillian Vesic-Petrovic for assisting with data analysis. All remain-

ing errors are, of course, the authors’own.

1

These figures are based on Bureau of Labor Statistics data and calculations performed by the authors.

INDUSTRIAL RELATIONS, Vol. 53, No. 4 (October 2014). ©2014 Regents of the University of California

Published by Wiley Periodicals, Inc., 350 Main Street, Malden, MA 02148, USA, and 9600 Garsington

Road, Oxford, OX4 2DQ, UK.

543

recent economic downturn has been unprecedented in the post–World War II

period. Widespread joblessness and the well-documented negative effects it has

had on American families and their communities have prompted interest in

policies that would encourage work sharing in lieu of layoffs during future

economic downturns.

During the recession, unemployment insurance (UI) rules in the majority of

U.S. states discouraged the use of work sharing. In most states, workers were

eligible for UI benefits only if they were laid off. A large body of research

shows that the U.S. unemployment insurance system has the effect of subsidiz-

ing layoffs, causing employers to rely too much on layoffs and too little on

work sharing to achieve hours reductions during recessions. At the start of the

recent recession only seventeen states offered short-time compensation (STC)

—prorated unemployment benefits for workers whose hours are temporarily

reduced for economic reasons—and, even during prior recessions, take-up of

these benefits had always been extremely low.

The depth of the recent recession, however, sparked notably greater use of

short-time compensation in states that already had STC programs as well as

interest among additional states in implementing new STC programs. The

Middle Class Tax Relief and Job Creation Act passed by the U.S. Congress in

February 2012 included provisions designed to promote the use of work

sharing. Short-time compensation programs operating in other developed

countries—where short-time compensation has long been available and used

extensively—played a significant role in mitigating layoffs during the eco-

nomic crisis by encouraging greater use of work sharing (Organisation for

Economic Co-operation and Development (OECD) 2010a). An important

empirical question is the extent to which an expansion of STC programs simi-

larly could prevent employment losses during future recessions in the United

States.

In this paper we review arguments concerning the desirability of expanding

STC programs in the United States and present new evidence on the use of

these programs during the recent recession. We document that STC take-up

rates in several U.S. states were comparable in recent years to take-up rates in

Canada and the take-up rate in Rhode Island was considerably higher. STC

use tends to be concentrated in manufacturing. Comparing the adjustment of

manufacturing production employment and hours in STC and non-STC states

during the recession, we find that manufacturers in STC states generally relied

relatively more on hours reductions and relatively less on employment reduc-

tions to adjust total hours worked. If it can be assumed that the availability of

STC benefits was responsible for the relatively greater reliance on hours

adjustments in those states and that the reduction in total hours would have

been the same in the absence of STC, this evidence implies that STC programs

544 / KATHARINE G. ABRAHAM AND SUSAN N. HOUSEMAN