Pass the Stimulus - Then Help Shorten the Work Week

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Dean Baker
New York Daily News, January 28, 2009

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As job losses hemorrhage, the American economy is in desperate need of a stimulus. It is becoming increasingly clear that Congress must work rapidly to approve some version of President Obama's plan.

Then, Obama and the Congress should very quickly turn to taking a second, temporary step to create more jobs: creating incentives for companies to reduce the workweek and work year for many Americans.

The idea is not as radical as it sounds - and could prove very productive indeed for the American worker.

Recent Labor Department data make the scope of the problem clear: The economy lost more than 500,000 jobs a month in the last quarter of 2008. This adds insult to injury as state and local governments are already facing serious budget strains that will lead to massive service cutbacks and public sector layoffs.

President Obama's $825 billion plan is a very good first step to contain the damage. Much of the package would go directly toward maintaining state and local services. The package also would help those hardest hit by the downturn with increased funding for unemployment benefits. For the first time, the feds also would cover most of the cost of health care insurance for unemployed workers. Finally, infrastructure and energy spending would inject money into the economy over the next two years and offer long-term benefits.

But, big as the plan is, we're fooling ourselves if we believe that our work is done when some version of this stimulus gets passed. As President Obama's own analysis showed, the package would still leave us with 7% unemployment two years from now - roughly the current rate - even if things go well. This is intolerable.

And of course, things could get worse. A further collapse of the banking system due to a tidal wave of bad debt or a run on the dollar are both plausible scenarios that could seriously worsen the situation.

In short, we must right now start brainstorming creative and temporary plans to boost the economy further. One innovative policy that would provide a quick boost to the economy and jobs - and lasting gains in reduced unemployment - is a tax incentive for shorter workweeks or work years.

No doubt, such a suggestion will make conservatives howl about liberals attempting to turn the United States into France, where in 2000 the government mandated a 35-hour workweek.

But I'm not suggesting the government force a shorter workweek; I'm suggesting it create incentives for businesses to make the choice themselves.

And in any event, there are worse examples to follow than France's on this score. The reduction in the workweek there created new jobs and improved productivity.

Incentivizing a shorter workweek in the U.S. could take different forms. To qualify, an employer who currently provides no paid vacation might offer all workers three weeks a year of paid vacation, approximately a 6% reduction in work time. Alternatively, employers could cut the standard workweek, say from 40 hours to 36 hours, a 10% reduction in work hours. Or they could offer paid sick leave or paid parental leave.

How would this help the economy? The tax break would allow the employer to compensate workers for fewer hours up to some limit, say a maximum of $2,500 per worker. That would cut work hours but maintain staffing levels.

As a result, workers would be getting just as much money as before the reduction in hours - but putting in 10% fewer hours. If workers have the same amount of money, then demand in the economy will be the same. At the same time, firms would then need to hire more workers to meet this demand, since they would be getting 10% fewer hours from each worker.

Such a tax break would stay in effect for just two years. However, if workers and employers liked the new work schedules, there would be a lasting benefit from this job creation measure.


Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy. He also has a blog on the American Prospect, "Beat the Press," where he discusses the media's coverage of economic issues.