The Valley PaperSources1994

Job Security: The Age of Anxiety

Final report for MGMT 630, Organizational Behavior and Theory, Minnesota State University, Mankato (then Mankato State University). Prepared by Brian Senjem, March 15, 1994.

Why this is here. This is the paper referred to in The Valley Between Here and Abundance. I wrote it in March 1994, when layoffs had just started reaching white-collar workers and the fear had no mechanism yet. It recommended short-time compensation in every state, stronger experience rating of unemployment taxes, and health coverage after a layoff. Thirty-two years later, three of those are rows or mechanisms in the Valley paper. It is posted here as written in 1994, typos and all, so that anyone can see how little the policy toolkit has moved. The one figure it cites (Figure 4-1, from Abraham and Houseman’s book) is not reproduced.

Introduction

An October 1993 Washington Post article includes a cartoon that depicts a businessman with a briefcase balancing on the ledge of a building. Uncle Sam is holding a net below him. The title of the article reads “Age of Anxiety: As Fears of Job Loss Grow, So Do Calls for a Safety Net.” While this cartoon adds a bit of humor to the issue of job security, employees are not laughing. They are taking job security very seriously as the article indicates by siting, “It’s evident in the widespread opposition to the North American Free Trade Agreement, in public support for some form of national health insurance, perhaps even in last year’s election of a Democratic president whose platform was summed up in one phrase: ‘It’s the economy, stupid.’”

Low job security is not foreign in America. A 1961 University of California, Berkeley study reported for lower and middle management, two areas of greatest importance are a higher-order need of self-actualization and a lower-order need of security.

In 1986, Opinion Research Corporation in Princeton, New Jersey found that following the recession of 1980-82, job security actually declined from 1983-86. The largest decrease was noted in managers, both exempt and nonexempt alike. Downsizing was noted as being partly responsible and work pressure was noted as increased.

The issue of job security brings to light some interesting questions. Are jobs unnecessarily unstable in the US? Could workers be offered more secure employment without placing excessive burdens on the companies that employ them? How do labor adjustment practices differ in the US versus other countries such as Germany? How responsible are the labor market policies and institutions for observed cross-country differences in adjustment practices? Does job security for workers inhibit necessary adjustment? What effects do labor adjustment practices have on who bears the burden of adjustment to economic shocks? Can the policies that help Germany increase the employment stability of workers be successfully transferred to the US without burdening employers?

Analysis

The Age of Anxiety article out of an October 1993 Washington Post paper describes the job security problem in the US. The article sites some of President Clinton’s most profound statements. President Clinton spoke to the AFL-CIO regarding the North American Free Trade Agreement (NAFTA). He said, “What I really believe is that this [agreement] has become the symbol of the legitimate grievances of the American working people about the way they’ve been worked over the last 12 years … I think that people are so insecure in their jobs, they’re so uncertain that the people they work for really care about them, they’re so uncertain about what their kids are looking at in the future, that people are reluctant to take any risks for change.” Clinton promised his audience, “I have got to lay a foundation of personal security for the working people of this country and their families in order to succeed as your president.”

President Clinton has been planting the seeds of a new Social Security system with four major components. One, a national health care plan that would give workers health care protection even if they lost their jobs. Two, educational reforms to increase the quality and affordability of education. Three, toughening the requirements of companies that make pension promises and making defined contribution plans safer and more portable from job to job. And four, consolidating government assistance programs for workers into a single adjustment assistance program to help retrain workers who have lost their jobs. This would combine unemployment payments with training to help individuals survive financially while they receive training for a new job.

The Age of Anxiety article also points out some statistics. In 1993 alone, more than 2 million Americans are expected to permanently lose their jobs. According to the Labor Department, most working Americans are earning less, after adjusting for inflation, than they did 15 years ago. Layoffs and unemployment have begun to affect white-collar as well as blue-collar workers. Discontented workers have now become a significant political force. Employees are worried about being hit by the three R’s of the modern workplace – reengineering, reinventing, and rightsizing. The Harvard guru of reengineering, Michael Hammer, says on average his clients reduce their workforce by 40 percent. Contingent workers, employees who are not part of the core company such as part-timers, temporaries, consultants, and subcontractors, now make up 25 percent of the civilian workforce. These contingent workers have little job security and often no benefits such as health insurance. The temporary services firm Manpower, Inc. now has twice as many employees as General Motors Corp.

Compared to companies in other countries, US companies are atypical to the extent they use layoffs. Other countries use more work sharing, attrition, hiring freezes, and early retirement options. In comparing Germany to the US from 1970 through 1990 (Figure 4-1), one can readily see that Germany’s unemployment levels remain rather steady compared to that of the US. Abraham/Houseman argue that many layoffs occur because current US policies bias employer decisions in favor of their use; the social costs associated with prevailing adjustment practices are inefficiently large.

German companies spend roughly twice as much per worker on training as do US companies. US companies fear losing their employees to other companies. The German government helps to pay for apprenticeship training. German companies share training costs through employer’s associations. However, smaller companies may not find it in their best interest to train employees due to economies of scale.

US employers rely heavily on layoffs to trim excess work force during economic downturns. Recent layoffs (1980s and 1990s) may be due to a changing economic structure rather than normal cyclical behavior. Worker demands for greater job protection. Job security provisions in collective bargaining agreements increased. In 1988 Congress passed legislation requiring employers to notify workers in advance of mass layoffs or plant closures. To encourage work sharing in lieu of layoffs, a few states have begun offering prorated unemployment benefits.

Employees of German companies enjoy much greater job security on average than do employees of US companies. German employees receive advance notice to dismissal, the right to compensation in a mass layoff, partial unemployment compensation for workers on a reduced schedule, and an extensive system of worker training. Although Germany experienced high unemployment in the 1980s, its economy generally has been strong during the postwar period.

Opponents to layoffs argue that excessive layoffs strain social services such as the health care system. Layoffs concentrate the costs of adjustment on a relatively small number of workers.

Proponents of layoffs argue that government intervention will generate costs that far outweigh any benefits. Measures to reduce layoffs will inhibit necessary labor adjustments, increase labor costs to companies, and lead to higher unemployment. Little empirical support exits for either side’s position. The book’s purpose is to provide careful empirical examination. Will employment protection laws be good or bad? Employment protection laws need to be studied as part of labor market policies.

Employment protection laws raise the cost to employers of laying off workers but compensate by subsidizing the cost of alternatives. For example, in Germany the unemployment insurance system is not experience rated as in the US. Employers that place workers on short time do not incur a tax penalty. The worker training system facilitates internal transfers of workers into positions vacated by others. They have a broadly skilled work force due to Germany’s apprenticeship system.

Based on a statistical analysis of labor adjustments in manufacturing industries in Germany, little evidence is found to suggest that German labor market policies inhibit adjustment. Short-run employment levels adjusted proportionately less. They compensate with larger adjustments to average hours per worker. In the short-run, the adjustment of total labor input is generally similar in the two countries. In Germany, short-time work is the major adjustment, where as in the US temporary layoffs are the major adjustment.

Current US policies bias employer decisions in favor of layoffs. Work-sharing schemes were used extensively during the Great Depression. Labor historians have attributed reduction of work sharing and increase of layoffs as the predominant mechanism of labor adjustment in the US in part to the introduction of unemployment insurance. The availability of unemployment insurance makes layoffs more socially acceptable. Germany’s unemployment insurance, on the other hand, is prorated. It is interesting to note that the regulation of layoffs did not contribute significantly to Germany’s unemployment problem.

Financing of the unemployment insurance system further encourages layoffs. It seems the system in place to ease the burden of layoffs actually encourages the use of layoffs as a mechanism for labor adjustments. In the US, the unemployment insurance system is supported by revenues from a payroll tax (at the Federal level it is 6.5 percent of the first $7000 of wages). The employer’s tax is based in part on its history of layoffs. However, the experience rating of unemployment taxes is imperfect in the sense that the added taxes an employer pays as a result of laying off another worker are typically less than the costs to the unemployment insurance system of paying that worker benefits. Because of this employers layoff too many workers. Health care costs are transferred to a third party by layoffs. Layoffs contribute to health care costs.

Overall, German policies have been fairly successful at giving workers more stable employment without inhibiting labor adjustment and without imposing burdensome costs on employers. Institutions differ and policies that work well in one country may not be easily transferred to another. However, we can build on the institutional structure of the US by selectively drawing on policies from Germany’s experience to implement in the US.

Recommendations

The US should not adopt Germany’s policies wholesale because institutions differ and policies may not be easily transferable. However, the US should build on its institutional structure by selecting certain German policies that will fit well.

One policy option for the US is to form an industry consortium that would pool the costs & benefits of training across affiliated companies. The department of labor currently provides limited funding for such activities through demonstration projects. Companies can avoid laying off workers by transferring them to other positions if those employees have a broad skill base.

Introduce a short-time compensation (STC) program to the remaining states. Fourteen states have experimented with providing prorated unemployment benefits. Increase the use of STC in states that already have the programs. In some states with STC programs, employers who put workers on short time may incur higher unemployment insurance taxes than if they simply lay off workers. Paperwork should be reduced and programs should be modified to allow employers more flexibility in the scheduling of workers short time. State governments could provide subsidies or loans to help cover the cost to companies of maintaining certain benefits for workers on short time. The cost would be offset in part by lower expenditures on Medicaid.

Provide more publicity of STC availability. Half of employers not in STC programs in states with STC did not know about the existence of the STC program. Discourage layoffs and assist dislocated workers. Increase experience rating of unemployment insurance. States set minimum and maximum tax rates. Strengthen advance notice of mass layoffs requirements. Severance payments to laid-off workers like other countries do is not recommended, however, it is recommended to have companies be required to continue health insurance coverage for one to two months after laying off workers.

We can learn a lot from other countries. US workers should enjoy better job security without encumbering employers. Employers shouldn’t have to fear losing their employees and incurring high training and turnover costs. The workplace can be a better place, and learning from other countries is a great way to start.

Bibliography

© 1994, 2026 Brian Senjem. Posted as written in 1994. Back to The Valley Between Here and Abundance.