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As the Economy Continues to Struggle, Can Short-Time Compensation Offer Relief?

One of the many ways policymakers expanded unemployment insurance (UI) in response to the COVID-19 pandemic was to provide additional funding for Short-Time Compensation (STC) programs. STC—also known as work share—allows employees experiencing reduced hours to collect unemployment benefits to replace a portion of their lost wages. This potentially averts layoffs by financially supporting employees in situations when their employer is only partially able to retain them on payroll. As the economy continues to struggle, the Biden administration is promoting STC as an avenue to keep workers connected to their employers.

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How STC Works

STC provides employees whose hours have been cut with a prorated portion of UI benefits. For an employee to be eligible for STC, their employer must elect to participate in the program by submitting to the state workforce agency a written plan that specifies the percentage reduction in the hours for affected employees. Employers must maintain health and retirement benefits for employees receiving STC. While those on the program are not required to meet any work search requirements, they must be available for their normal workweek. Participating workers may also enroll in workforce development programs to enhance their skills while their hours have been reduced.

Like regular UI, states design their own STC programs, which are administered by the state workforce agency and funded by state UI payroll taxes on firms. As such, STC eligibility, work hour requirements, and weeks of available benefits vary considerably across the 25 states with operational programs. For example, Texas requires that a reduction in normal weekly hours between 10% to 40% is applied to at least 10% of the employees in an affected unit, whereas New York requires a reduction in normal weekly hours between 20% to 60% applied to at least two employees. Additionally, seasonal, intermittent, and temporary employees can participate in New York’s STC program, but Florida requires participants to be full-time, permanent employees.

STC in the Pandemic Response

The CARES Act provided 100% federal financing for 26 weeks of benefits in states with existing STC programs and 50% federal financing to states establishing temporary programs, in addition to allocating $100 million for implementation and administration. This support was originally set to expire at the end of 2020, but the Continued Assistance for Unemployed Workers Act extended the federal financing of STC through March 14, 2021.

Several states, including Virginia, Wisconsin, and Ohio, used the funding made available by the CARES Act to create or grow their STC programs, increasing the number of workers and employers using the program. Despite these expansions, only 103,000 of the 18 million workers collecting unemployment benefits are receiving them through a work sharing program.

President Joe Biden’s proposed $1.9 trillion American Rescue Plan seeks to allocate further federal resources to continue fully funding work share programs through September 2021 and extend the number of weeks a worker can claim STC benefits.

STC Stabilizes Employment During a Recession

Research on existing work sharing programs in Japan and Europe demonstrates that this approach helps stabilize employment during economic downturns. During the Great Recession, Germany’s program preserved an estimated 580,000 jobs that would have otherwise been cut. While the use of STC is more limited in the United States, research indicates that STC could have saved many more jobs during the Great Recession, had sectors like manufacturing made more extensive use of the program.

While this evidence is promising, the benefits are generally limited to permanent workers, as the program design excludes most temporary workers from participation. Further, other research indicates STC’s positive impact is limited to a period of economic instability. In the long-run, STC may harm employment by subsidizing part-time workers who could find full-time work elsewhere and undermining the efficient reallocation of labor.

Barriers to Implementation

As the economic recovery remains uncertain, STC could play an important role in keeping workers connected to their employers, but administrative and funding challenges continue to inhibit large-scale implementation. Program requirements differ across states, complicating the application process for employers operating in multiple states. Because STC is financed in the same manner as regular UI, increased participation in STC among a firm’s employees can increase that firm’s state UI tax rate.

Both of these issues may discourage employers from participating in STC and lead to terminations instead. Additionally, the administrative costs of implementing or expanding existing STC programs present a challenge for state workforce agencies that are already plagued by operational failures. STC can be burdensome and costly for states to administer because employer applications are approved on a case-by-case basis.

Conclusion

In combination with other UI programs, STC has the potential to stabilize employment and keep workers connected to the workforce both when an economic downturn begins, and as an economic recovery gets underway. While the current economy continues to struggle, improving and enhancing STC is one policy tool elected officials could use to promote work and support workers.

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