With over 15 million Americans out of work Congress is searching for ways to reduce unemployment. The latest idea, put forward by Sen. Jack Reed (D-RI) is “work sharing.” Under work-sharing, companies reduce the hours (and pay) of all their employees instead of laying off some workers and having the remaining employees work normal hours. The government then gives workers a pro-rata share of unemployment insurance payments to partially compensate them for their lost earnings from their lost hours.
Work sharing seems like a simple solution to the unemployment problem. Why not encourage companies to share the work that needs to be done instead of forcing some workers into unemployment? It prevents workers job skills from deteriorating and companies from having to retrain new workers when demand picks up. It makes so much sense that several European countries have already tried it. Studies of their experiences show that work sharing perfectly illustrates H.L. Mencken’s point: for every complex problem there is an answer that is clear, simple, and wrong.
Study after study after study shows that European work sharing programs have done nothing to increase employment. One study of 16 developed countries found no evidence that work sharing programs created or saved jobs. If anything, the evidence suggests that work sharing slightly reduces the number of workers companies hire. Sen. Reed wants to save jobs by cutting hours, but instead workers would work shorter hours in fewer jobs.
Say what? Do not employers have to hire more (or lay off fewer) workers if the rest of their workforce worked less?
No. The mistake comes from believing that there is a fixed amount of work in the economy to be divided among workers. If that were true, then cutting work hours would create more jobs. But the amount of work that can be done in the economy is virtually unlimited. Why? Because human desires are unlimited. Samuel Gompers, the founder of the American Federation of Labor, was once asked what his members wanted. He could answer in just one word: “More.” That is true of most people – if someone gave you $20,000 you could probably find a way to spend it. What would you buy? A down payment on a house? A vacation to Rome? More education?
All these things take work to produce. There is always more work to be done. If an individual electrician works 30 hours a week instead of 40, another electrician may work longer hours to pick up the slack. But if all the electricians in a city work fewer hours then electricians will do less electrical wiring, leaving the city poorer.
It does not feel like that in the middle of a recession. With unemployment at 10 percent it feels like the amount of work to do in the economy has fallen. But that is not the case. Rather, the types of work that need to be done are shifting. The housing and financial bubbles have collapsed. Americans want fewer expensive financial products or houses at sky-high prices and more of others goods and services. So the economy is shifting workers out of construction and finance and into new jobs that better serve American’s changed economic desires. Many unemployed workers will take jobs in companies that do not exist yet. They will work hard to produce new goods and services that Americans value. This transition can be prolonged and painful. It certainly is now.
But it is better to let jobs shift in the economy than to have taxpayers pay to encourage companies to cut their employees hours’. When that happens jobs do not increase – less work gets done.
Congress would do better to encourage entrepreneurial risk taking and investment. Unemployment has continued to rise not because of increased job losses but because job creation has fallen. The credit crunch and the risk of higher taxes and expensive regulation from Washington have reduced the incentive for and the ability of entrepreneurs to create the new jobs that unemployed workers would normally find. More entrepreneurship – not working fewer hours – will create jobs and lower unemployment.