Background papers for the 1999Manawatu Employment Summit
The Prosperity Covenant:
Social Policy Analyst
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.(1) The phrase, however, seems to have struck a chord with editorial writer and authors of introductory economics textbooks, who have borrowed it for use as a trump care in the debate over work time.(2)
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. Technical, that common usage itself commits several fallacies: "hasty generalisation", "straw man argument" and "non-sequitur of denying the antecedent".(3)
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 summarised 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 had, 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. (4)
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:
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 be 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 forms.
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 to it? Because his experiments showed that workers in his factories could produce more in five days than they could in six. (5) 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. (6) 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 spiralling 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 are in turn used to justify the slashing of social programmes.
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.(7) 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 wages 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 intelligently 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.
A brief presented to the Operation JOBS Roundtable
Vancouver, BC - February 19th, 1999
[Table of Contents] [Ian Ritchie]