Sunday, November 17, 2013

OMG: economics professor advocates shorter working hours as a cure for unemployment.

Richard Wolff, who for reasons which puzzle me has been made a professor of economics, has fallen for the old myth that shorter working hours can reduce unemployment.
You know the argument: if those in work do fewer hours per week, that leaves “work hours” that can be filled by the unemployed.
That alleged cure for unemployment is actually just one of a family of alleged cures which all involve reducing labour supply. The “family” includes early retirement, delayed entry into the labour market for youths, longer holidays, etc.
The flaw in the idea is as follows.
Increasing numbers employed is easy: just bump up demand. But there’s a problem, namely that as demand rises, a point comes where inflation kicks in a serious way.
Now why does inflation kick in? Well it’s because the lower  unemployment is, the more difficult it is for employers to locate the types of labour they want from the ranks of the unemployed, so they resort to out-competing each other for the services of those already in work: attractive job offers, attractive pay packages, etc. And that means the price of labour rises: i.e. inflation kicks in.
That problem is what you might call a purely “statistical” one: it’s the problem involved in locating suitable labour from a relatively small pool of unemployed individuals.
Now suppose those in work are forced to do fewer hours per week: the latter “statistical” problem is not ameliorated one iota!!!!! For example if there was a shortgage of plumbers in London before hours were cut, it will be JUST AS DIFFICULT TO LOCATE plumbers AFTER HOURS ARE CUT.
To take a simple example, if there are no plumbers amongst the unemployed at all before the cut in hours, there’ll still be none afterwards. So the contribution to inflation stemming from plumbers in London will be exactly the same after as before.
Let’s put all that another way: as full employment of labour is approached, the factor of production that an economy runs short of is . . . wait for it . . . labour!!!!

Capital equipment.
Of course you could argue that there are other factors that exacerbate inflation as demand rises. For example plant shortages might play a part. One problem with that argument is that plant utilisation is currently at a record 50 year low.
 No doubt plant shortages do play a part in inflation, but the amount of plant in an economy is simply proportional to the number of people or size of the workforce in a country (all else equal). I.e. double the number of people, and the amount of plant will double.
Or halve the number of hours people can work, and the amount of plant will halve approximately.
Thus plant shortages doubtless exacerbate labour shortages near full employment, but those plant shortages are simply a function of the amount of labour or person hours that are available.

Other advantages of shorter working hours.
And finally, the above points are not an attempt to imply that there are no merits whatever in shorter working hours. That is, for example, shorter hours may reduce stress or result in more output per hour. The latter alleged merits are not dealt with above. It’s just the “re-allocating hours from the employed to the unemployed” idea which is flawed.
 (h/t to Mike Norman for alerting me to the above Wolff article).

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