Keating: Reduced Hours or Layoffs?

August 4, 2014

By Maryann O. Keating Ph.D.

At dinner, the four-year-old reported that her nursery school classmate, Billy, had a bad day and acted mean. When asked what the teacher did, the four-year-old replied wide-eyed, “She took away Billy’s job.” Most of us can empathize with Billy’s symbolic loss of group identity. However, adult unemployment generally is beyond personal control and represents as well a loss of income in addition to emotional grief.

In the U.S., most employed workers in good standing are eligible for unemployment compensation on being laid off. If actively seeking and willing to accept another position, they receive partial wage compensation to tide their families over a temporary loss of income.

Eligibility and compensation vary by state. For example, 43 percent of those unemployed in Hawaii in 2011 were receiving benefits averaging $416 weekly, but in Mississippi only 27 percent of those unemployed received benefits averaging $190.

Unemployment compensation (UC), a federal-state partnership, is funded almost totally by employers. At the federal level, the overall UC program is administered by the U.S. Department of Labor, and each state maintains its own unemployment insurance agency; in Indiana it is the Department of Workplace Development. Generally, benefits to those eligible are paid up to 26 weeks. In periods of high and rising unemployment, “extended benefits” may be paid for 13 to 46 additional weeks. During the Great Recession of 2008, benefits in some states were extended to 99 weeks. Unemployment compensation is a federal entitlement, and each state is required to pay claims from its fund balances.

Currently, employers are required yearly to pay federal unemployment taxes (referred to as FUTA) of 6 percent on the first $7,000 earned by each of their employees.

Employers can take a credit up to 5.4 percent of this amount if they fully comply with their state unemployment taxes. FUTA taxes are used to cover the costs of administering unemployment compensation programs in all states and pay one-half of the cost of extended unemployment benefits (during periods of high unemployment). From this Federal Unemployment Account, states borrow, if necessary, to pay claims for unemployed residents.

Indiana began borrowing from the FUTA fund in November 2008 and presently has an outstanding loan balance. Because of outstanding loans, Indiana, with two other states in 2010 and 19 others in 2011, are referred to as credit-reduction states. As such, employers in those states are required to increase federal unemployment tax contributions to repay loans and restore funds earmarked for that state.

Following the 2008 recession, many workers exhausted their unemployment benefits and others dropped out of the labor force completely. In response, the Middle Class Tax Relief and Job Creation Act of 2012 proposed a policy aimed at helping employers retain skilled workers and employees retain their jobs with partly recompensed benefits during economic turndowns. This policy proposal is referred to as short-time compensation or work sharing.

In such a Work Share program, employers reduce the hours and wages of all workers in a particular group. All impacted workers are entitled to supplement their reduced paychecks with unemployment compensation. Work Share contrasts with completely laying off individual members of a particular work group. The 2012 Act offered federal revenue for a limited time to states to implement the program and educate employers about the program.

Indiana missed the deadline for receiving about $2 million in federal dollars to initiate the program but retains the opportunity to reconsider Work Share during this next legislative schedule. The act also provides 100 percent federal reimbursement for Short Time compensation costs for up to 156 weeks (three years). The Center for Economic and Policy Research estimated that Indiana could have saved more than $17.1 million over three years by adopting the program and substituting federal revenue for state unemployment costs.

So, should Hoosiers attempt to get the Work Share measure passed in the General Assembly?

The Indiana Institute for Working Families and the Indiana Chamber of Commerce are reported to be proponents. The Department of Workplace Development is opposed.

Immediately, the implementation of the program raises questions. Is this an attempt by government to disguise unemployment? Should we be concerned about an increase in the number of households dependent on government income? Does it signify more federal involvement in workplace hiring decisions? Will it add to the national debt by introducing general tax revenue into a program essentially funded by employers? How much discretion do firms have in deciding how to implement the policy? Would the program affect economic growth by reducing the flexibility of employers and employees in adapting to long-term economic and technological changes?

Highlights of the Department of Labor guidelines indicate that before a request for short-time compensation is considered for government approval there must be a needed 10-percent workweek reduction for the affected unit. Employers cannot have significantly reduced the workforce during the preceding four months and must demonstrate need for reducing work hours in terms of the existing program. Employees would not be required to conduct a job search to receive pro-rated benefits, and employers must continue to provide full health and retirement benefits to all affected workers. If the workforce is unionized, the union must give consent to the request.

The goal of the Work Share proposal appears to address economic turndowns of relatively short duration. It does not attempt to deal with negative social effects associated with long-term unemployment. What happens when years after a recession ends, businesses of all sizes are slow to restore full-time status to workers?

A better program might be to allow businesses to focus on expansion and job creation, rather than jumping through the compliance hassles associated with more complicated unemployment compensation regulations.

Existing unemployment compensation policy is far from perfect, and we have no sure way of knowing the unintended consequences of this new Time Share proposal. We do know that unemployment is quite painful — even for four-year-olds having a bad day.

Maryann O. Keating, Ph.D., a resident of South Bend and an adjunct scholar of the Indiana Policy Review Foundation, is co-author of “Microeconomics for Public Managers,” Wiley/Blackwell, 2009.



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