To reduce unemployment, companies should cut hours instead of laying off staff

Unemployment is rising sharply in the UK. Large sections of the workforce also face redundancy as the furlough scheme is phased out. It is clear that, without a radical shift in policy, many millions of workers will confront real hardship.

We know from research that unemployment has “scarring effects” on workers. Beyond the direct distresses of being out of work, there are long-term penalties in terms of lower well-being and lost earnings. The costs of unemployment, economic as well as human, are severe and require urgent action.

Here is where reducing people’s hours, also known as short-time working, could play a role. Jobs could be saved and more people shielded from the negative effects of unemployment. Further, more of us could enjoy the benefits that come from both work and leisure. A coordinated policy of short-time working is long overdue in the UK and it would help to alleviate the economic crisis that we are now living through.

Beyond furloughing

The UK government implemented furloughing to protect the wages of workers. Under its coronavirus job-retention scheme, 80% of workers’ wages have been covered by the state, up to a maximum of £2,500 per month. Having started on April 20 2020, the scheme is due to expire on October 31.

It is worth noting that furloughing is more about protecting incomes than saving jobs. Employers have the choice as to whether or not to furlough workers and the furlough scheme has not protected all workers from redundancy. Recent job losses in retail and tourism reflect this.

That said, furloughing has offered many people some respite in the context of an economy that cannot reopen fully. Over 9 million UK workers have been furloughed at some point in time. Many have been able to pay their bills and continue spending as a result. It is also clear that unemployment would be a lot higher without furloughing.

The concern is the temporary nature of the furlough scheme. While furloughed workers have been protected, the withdrawal of the scheme will push many into unemployment. This possibility seems highly likely, given the lack of any broader stimulus package or wider policy framework to tackle unemployment. Those moving from furloughing to redundancy will face an ungenerous and hostile benefit system.

While the potential for higher unemployment has led to calls for an extension of furloughing, it can also be seen to highlight the need to implement new initiatives, including a short-time work scheme.

Short-time working

Other countries have used short-time working to reduce the effect of recessions. Germany is an important example here. The Kurzarbeit scheme, where the government replaces the income of workers who have been moved to shorter work hours, has not only protected jobs in downturns but also enabled more rapid recovery. Germany was one of the few countries that was able to quickly return to low levels of unemployment after the crisis, despite a significant contraction in GDP. This reflects the success of its short-time work scheme.

During the coronavirus crisis, the German government has extended and augmented Kurzarbeit. Workers in Germany can now gain up to 80% of foregone earnings for up to 21 months. In recent months, Germany has managed (unlike the UK) to avoid an increase in unemployment.

Other EU countries, such as Belgium, France and Italy, also adopted short-time working schemes following the 2007-08 financial crisis. This improved their unemployment levels, albeit not to the same extent as Germany. They also failed to achieve the unemployment levels of some countries such as the UK that didn’t adopt coordinated short-time working. Some British firms encouraged employees to reduce their working hours in the aftermath of the 2007-08 crisis, though much of the UK’s relatively moderate unemployment numbers were a result of people relying on low-quality, part-time jobs because there was often little else available.

Reducing hours instead of firing people offers clear benefits to both employees and businesses. It offers employees a way to support their incomes, despite shorter work hours. It also offers scope for them to remain connected with work and to use and exercise valuable skills. Employers, meanwhile, gain from retaining the skills of their workers and avoid the costs of firing and rehiring them.

The prospect of higher unemployment, in short, warrants the adoption of a short-time working scheme in the UK.

Working less is more

Reducing the time we all spend working is not just about reducing unemployment. It is also about changing the conditions of work and life in society. The priority should not be to restore work as it was, but to curtail the hours we work in general. Part of the UK government’s narrative to “build back better” must be to shift society from a culture of long hours spent working to a way of life that supports and encourages more free time.

Short-time working, in this case, should match with a broader commitment to achieve a four-day work week. The latter goal is gaining support on both the right and left of the political spectrum. The benefits of shorter work time, from gender equality through to climate change mitigation, remain clear. These benefits add to those of sharing the work that’s actually required in society and creating more time for ourselves.

Crises are times for critical reflection about the system in which we live. They are also occasions for renewal and reform. Reducing working hours will not only help us recover from the coronavirus-induced economic crisis; it is an important step towards a world where we all work less and are less dependent on paid work.

David Spencer has received funding from ESRC, EU and EPSRC.