The Paid Vacation Route to Full Employment

The economics profession has hit a roadblock in terms of being able to design policies that can help the economy. On the one hand we have many prominent economists, like Paul Krugman and Larry Summers, who say the problem is that we don’t have enough demand to get us back to full employment. There is a simple remedy in this story; get the government to spend more money on items like infrastructure, education, and clean energy.

This is a simple story, but politically it is a non-starter. Few Democrats are prepared to push for anything more than nickels and dimes in terms of increased spending, nothing close to magnitudes that would be needed. As far as the Republicans in Congress, it would be easier to convert the Islamic State folks to Christianity. (We could also boost demand by lowering the dollar and thereby reducing the trade deficit, but economists don’t talk about that one.)

The other side of the professional divide in economics doesn’t have much to offer on full employment because they say we are already there. The argument goes that people have dropped out of the labor force because they would rather not work at the wage their skills command in the market. In this story, we may want to find ways to educate or train people so they have more skills, but unemployment is not really a problem in today’s economy.

The notion that 7 million people (the drop in population adjusted employment since the start of the recession) just decided they don’t feel like working, doesn’t pass the laugh test outside of economic departments and corporate boardrooms. This leaves us stuck with a policy prescription – more stimulus – that has zero political prospect any time in the foreseeable future.

There is an alternative. If we can’t take steps to increase the demand for labor, we can go the other way and try to reduce the supply. Specifically, we can try to increase the number of people employed by reducing the average number of hours worked.

That should not sound far out. This is exactly the route taken by Germany, a country often held up as one of the few economic success stories in the world today.

Contrary to what is often claimed, Germany has not had booming growth. In fact, its growth since the beginning of the recession has been somewhat slower than growth in the United States. Nonetheless, its unemployment rate is 5.0 percent. And unlike the United States, its low unemployment rate is not due to people leaving the labor force. The percentage of the population employed in Germany rose by 4.4 percentage points from the pre-recession level. By contrast, it fell by 3.6 percentage points in the United States. If the United States had seen the same increase in the percentage of the population working as Germany, another 20 million people would have jobs right now.

The secret to Germany’s success is in large part that it has been better able to distribute the available work. According to the OECD, the average length of the work year in Germany is 1388 hours. That is 400 hours less than 1788 hours for an average worker in the United States.

Germany has a variety of policies to spread the work. The simplest one is its work sharing program. The government encourages employers to reduce work hours rather than lay off workers in response to a falloff in demand. The government makes up most of the lost pay for workers who have a reduction in hours.

This is a straight win-win situation for everyone involved. The government would have paid unemployment benefits to workers who lose their jobs. Instead it is making up a portion of the lost pay for workers putting in fewer hours.

Germany has long mandated paid family leave, paid sick days, and several weeks of paid vacation every year. All of these policies have the effect of shortening the average hours workers put in on the job each year. By contrast, the policy of having benefits like pensions and health care insurance provided by employers had the effect of lengthening hours, since it means there are high overhead cost per worker.

Much can be gained by following the German path. Twenty-seven states have already followed Germany and included work sharing as part of their state’s unemployment compensation system. We just need to educate employers so that more will take advantage of the system.

Several state and local governments have also taken the lead in mandating paid family leave and/or paid sick days for workers. These policies are needed first and foremost to accommodate the family responsibilities of workers, but they also have the benefit of redistributing the work. More states are almost certain to follow the lead of a list that already includes California and New Jersey on family leave and Connecticut on paid sick leave.

The best aspect of the sharing the work route is that state and local governments can take the initiative to improve both the work environment and employment prospects for their workers. They don’t have to wait for action from Washington. That’s a good thing, since those waiting for Washington to take steps to bring the economy back to full employment are likely to be waiting a long time.