Friday, April 23, 2010

Counter-cyclical free-market solution to cyclical unemployment?

Rising unemployment rates have been the defining characteristic of the Great Recession. However, as Jack Ewing writes, Germany has been relatively successful in maintaining its labor market stable during this period.

One reason for its success was the use of the so-called short work scheme, "Kurzarbeit", which allows companies to cut workers’ hours and the government would make up some of the lost wages. During the first quarter of 2010, 22% of all firms and 39% of manufacturers were estimated to have used Kurzarbeit.

The most interesting instrument was the use of counter-cyclical work-time accounts. This permits workers to bank overtime hours during busy periods and then take paid time off when business is slow. Such provisions, enshrined in work contracts, provide flexibility to both employers and workers to more effectively manage their workforce. Are work-time accounts a free-market answer to addressing the problem of cyclical unemployment?

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