The prosperity covenant: how reducing work time really works to create jobs
by Tom Walker
A brief presented to the
Operation JOBS Roundtable
Vancouver, B.C.
February 19th , 1999
(This brief is posted at www.vcn.bc.ca/timework/covenant.htm with updates
and links to come.)
"The harder we crowd business for time, the more efficient it becomes."
-- Henry Ford
It seems reasonable to suppose that if a company had ten employees who each
regularly worked four hours a week overtime, the employer could pool those
hours and hire an eleventh worker, thus increasing employment at the company
by ten per cent. Likewise, if long hours are being worked throughout the
economy, one would expect it to be feasible to spread out those hours of
work and create new jobs. If this were true, unemployment could be abolished
with the stroke of a pen.
"Wrong!" the economists tell us, "that is the lump-of-labour fallacy, which
assumes there is only a fixed amount of work to be done. And that is clearly
a fallacy!"
What is this strange sounding "lump-of-labour fallacy", which insists it
would be uneconomical to redistribute work time? Why is there seemingly no
alternative to the same old right-wing, "supply-side" nostrums that have
brought two decades of rising inequality, enfeebled social programs and a
crescendo of potentially disastrous financial speculation?
What is the lump-of-labour fallacy?
The lump-of-labour fallacy has been described as "one of the best known
fallacies in economics." Whether or not that's true, it certainly is one of
the least understood and the most misused.
As conceived in 1891 by English economist David Schloss, the fallacy of "the
theory of the lump of labour" had nothing to do "with the question of the
length of the working day." Schloss was writing about something else
entirely -- why workers didn't like piece-rate wages. The phrase, however,
seems to have struck a chord with editorial writers and authors of
introductory economics textbooks, who have borrowed it for use as a trump
card in the debate over work time.
The lump-of-labour fallacy simply says that there is not a "fixed amount of
work to be done" and therefore one cannot share out such an assumed, fixed
amount of work. End of story. The argument has nothing to say, in general,
about whether jobs can be created by reducing the hours of work. It is a
rebuttal only to a specific, popular simplification. The lump-of-labour
theory is indeed a fallacy, but so is the use of the fallacy to make a case
against the job creation possibilities of reduced work time. Technically,
that common usage itselfs commits several fallacies: "hasty generalization",
"straw man argument" and "non-sequitur of denying the antecedent".
The productivity paradox
A better case against relying on reduced work time to cure unemployment was
argued -- also during the 1890s -- by another English economist, John Rae.
That argument can be best summarized as the "productivity paradox". Rae
argued -- and presented an impressive stack of evidence for the case -- that
workers would probably produce as much or more in eight hours as they
previously had in nine or ten hours and therefore reducing the hours of work
would create no additional demand for labour. On the other hand, Rae
cautioned, if the workers didn't produce as much as before in the shorter
hours, labour costs would go up and that would reduce the demand for labour.
Although it presents a broader argument than the lump-of-labour fallacy, the
productivity paradox also has a fatal flaw. It deals exclusively with an
either/or situation. Thus it presents a false dilemma -- another fallacy. In
the actual economy, a properly-designed reduction in the standard hours of
work would encounter some workplaces where total output per worker could be
maintained or even increased while other workplaces would see a decline in
per-worker output, although that decline would usually be less than
proportionate to the decline in hours.
How reducing work time really works
It is precisely the difference between the effects on output in different
workplaces that gives shorter work time its power to create jobs. The key
concepts for explaining how this works are:
1. efficiency
and
2. competition
Efficiency and competition are two words that business people like to use.
They might even seem somewhat off-putting to people whose priorities are
equity and social justice. So their use needs to be carefully defined.
Efficiency, in the sense we're using it here, means the efficient management
of human resources. If the required amount of a product or service can be
produced or performed safely and comfortably in seven hours' work instead of
eight hours, it should be produced in seven hours. There shouldn't be
bottlenecks or screw-ups to keep people hanging around, getting paid for
doing nothing. Furthermore, the skills, knowledge and experience of the
workforce should be used to best effect.
Competition means that well-managed, efficient firms and their employees
should receive the maximum benefit of their efficiency. Poorly-managed,
inefficient firms and their employees should not be enabled to shift the
burden of their excess costs to the public and to the better managed firms.
So, how do shorter hours of work drive efficiency and competition? Setting
an economy-wide standard for hours of work that is closer to the most
productive arrangement for the most efficient firms increases those firms'
ability to benefit from their efficiency. It also makes it harder for
inefficient firms to pass on their excess costs to the public in the form of
substandard wages, wasted skills and knowledge, and stressful long hours of
work.
If required to match the hours of work of the pace-setting firms, less
efficient employers will initially have to hire additional workers to
maintain a given level of output. That is to say, there will be some
temporary "work-spreading". This will help to absorb the unemployed and
reduce the social costs of that unemployment. The overall effect would be to
reduce the average cost of labour economy-wide even as it increases the cost
of labour to the less efficient firms.
But over the longer term, competition will press the less efficient firms to
invest in improved techniques and better management. The long-term
employment gains come, not from the sharing out of an existing amount of
work, but from the lower costs of production and higher effective demand
that shorter work times stimulate. The main obstacle to understanding this
dynamic comes from the stubborn (and completely unsupportable) assumption
that output increases or decreases in direct proportion to the number of
hours worked.
That output does not rise or fall in direct proportion to the number of
hours worked is a lesson that seemingly has to be relearned each generation.
In 1848, the English parliament passed the ten-hours law and total output
per-worker, per-day increased. In the 1890s employers experimented widely
with the eight hour day and repeatedly found that total output per-worker
increased. In the first decades of the 20th century, Frederick W. Taylor,
the originator of "scientific management" prescribed reduced work times and
attained remarkable increases in per-worker output.
In the 1920s, Henry Ford experimented for several years with work schedules
and finally, in 1926, introduced a five day, 40 hour week for six days pay.
Why did Ford do it? Because his experiments showed that workers in his
factories could produce more in five days than they could in six. At every
step along the way -- in the 1840s, the 1890s and the 1920s -- the consensus
of business opinion insisted that shorter hours would strangle output and
spell economic ruin.
Ironically, the assumption that output varies in direct proportion to the
number of hours worked is a restatement of the old lump-of-labour fallacy.
Those opponents of shorter work time who complacently -- and mistakenly --
invoke the lump-of-labour fallacy are the one's who are actually guilty of
committing it!
How long should the work week be?
The optimal length of the standard work week has changed historically along
with changes in the intensity of work -- and it will continue to change. The
optimal length at any particular time can only be determined by
experimentation. And the research is not simple -- the relationship between
the hours of work and the intensity of effort is not mechanical. Past
research on optimal work times has invariably found a lag between a change
in schedule and an increase in productivity as people work out new ways of
doing things and as they gradually recover from accumulated fatigue. There
also needs to be ongoing research into the relative benefits of other
arrangements, such as longer vacation times or phased retirement, compared
with shorter work weeks.
A common sense rule of thumb should be, however, that when unemployment is
high, the hours of work are too long. Nothing could be simpler. High levels
of unemployment enable poorly-managed companies to obtain labour at a
discount and to pass on their excess costs to the public. High unemployment
can never be "good for the economy".
Unemployment isn't "natural"
A policy to fight unemployment by reducing the hours of work goes against
the received economic orthodoxy of the past quarter century. That orthodoxy
-- following Milton Friedman's theory of a "natural" or non-accelerating
inflation rate of unemployment (NAIRU) -- has held that a certain amount of
unemployment is "necessary" to prevent spiraling inflation. The orthodox
policy keeps interest rates and unemployment high in order to fight
inflation. High interest rates and the social costs of unemployment
contribute to government deficits, which in turn are used to justify the
slashing of social programs.
James K. Galbraith, in his book Created Unequal: The Crisis in American Pay,
has shown the NAIRU theory to be both theoretically incoherent and
completely unsupported by the historical evidence. Those of us on the ground
in the economy already know well enough from experience the consequences of
the conservative nostrums of high interest rates, chronic unemployment,
soaring inequality, dismantled social programs and betrayed promises of a
larger "pie-in-the-sky" of prosperity.
Right-wing economic policy fails because it insists on rewarding investors
without regard to how efficiently that investment employs labour. It waves
the flag of "competitiveness" while ensuring, through the maintenance of
high unemployment, that poorly-managed firms are exempt from competing in
the crucial area of how efficiently they employ labour resources. Right-wing
policy proclaims it's opposition, "in principle", to a free lunch while at
the same time serving up a bottomless banquet of low-cost labour to "dumb
money".
A Prosperity Covenant
Reducing the hours of work is not an economic panacea. The efficiency gains
from shorter hours -- and the long term employment gains -- don't come
automatically from the reduction in hours. They come from adjusting to the
reduction in hours. The process of adjustment requires co-operation between
labour and management. That adjustment could be undermined by labour
insisting on windfall gains from shorter hours or by managers passively
allowing their gloomy expectations to become self-fulfilling prophecies.
The adjustment undoubtedly requires other government policies that
complement a reduction in work time -- such as changes in the structure of
payroll taxes, responsive fiscal and monetary policies, support for
appropriate infrastructure development, etc. It is also unlikely that a
single configuration of work time would be appropriate for all occupations
and all industries. Perhaps an annual cap on work hours or a flexible band
of hours would make more sense than a fixed daily and weekly limit. Like any
other technology, the success of a policy for reducing the hours of work
depends crucially on the design of the policy.
Although a reduction in work time would not be a panacea, it would be a
powerful antidote to the toxic, high-unemployment orthodoxy that has been
poisoning the Canadian economy for two decades. The recent federal budget
speaks of the need for a "productivity framework". But there can be no
sustained increase in productivity without an assurance that all will share
fairly in the resulting prosperity -- a prosperity covenant. Reducing the
hours of work lays the indispensable foundation for such a prosperity covenant.
regards,
Tom Walker
