Sunday, January 26, 2014

Germany’s work sharing scheme achieves nothing.

I’m a Dean Baker fan, but I’m not comfortable with the praisehe heaps on Germany’s work sharing scheme in a recent article entitled “The Myth of the German Boom…”. In fact he attributes the difference in unemployment rates as between Germany and France (about 5% vis a vis 10%) largely to work sharing.

The flaw in work sharing.

Work sharing is just one of numerous alleged cures for unemployment which all aim to reduce labour supply. Those quack cures include early retirement, delayed entry to the labour force for youths, longer holidays – the list goes on and on.

The big idea is thus. 1. Have the EMPLOYED do less work. 2. That leaves work undone which allegedly can be done by the unemployed. And the flaw in those alleged cures is sometimes referred as the “lump of labour fallacy” because it assumes there is some sort of fixed amount of work to be done.

To expand on that, the flaw in the idea is thus. Raising employment is easy: just bump up demand. But the constraint on that cure is inflation: that is, the more unemployment falls, the more difficult it is for employers to find the types of labour they want amongst the ranks of the unemployed. So they resort to out-bidding each other for the services of those who are already employed. And that equals inflation.

Now if those already in work do fewer hours (either because they are FORCED to do so or because they do so voluntarily) and aggregate demand remains constant, then there is indeed some “undone work” which it might seem can be done by the unemployed. But – and this is the crucial flaw in the above quack remedy – if inflation becomes excessive when say 5% of the workforce is unemployed (because employers can’t find the labour they want amongst the ranks of the unemployed) than that self same problem will arise AFTER work sharing has been implemented, and when 5% of the worforce is unemployed. I.e. there is no reason to suppose that work sharing reduces NAIRU.
Or put another way, if aggregate labour supply can be reduced relative to aggregate demand for labour, why not do that by raising aggregate demand? That way people (or at least more of them than pertains in a work sharing scenario) can do the number of hours work they want.

Number of employees involved.

As to the actual NUMBERS in Germany who are engaged in work sharing, estimates seem to be all over the place. According to this CNN article, one in four Germany employees are on some sort of work sharing scheme, plus such schemes have been in place for decades. That’s complete madness because over recent decades there have been periods when unemployment was as low as it could possibly go, thus work sharing would have been a waste of time.

In contrast, this ILO publicationclaims the total number in Germany engaged in some sort of work sharing scheme was 1.5 million.

Germany versus the periphery.

In contrast to Germany, would work sharing be beneficial in the periphery? There is a plausible reason for thinking so, namely that periphery countries cannot cut unemployment to NAIRU since they’re deliberately restraining demand so as to get their wages, cost and prices down (or rather they’re being forced to do that by the Euro authorities). But there’s a problem there (which readers will immediately recognise if they’ve grasped the central flaw in the above quack remedies for unemployment). The problem is thus.

As just mentioned, the whole point of austerity in the periphery is to get costs and prices down. Now as explained above, if work sharing is implemented and aggregate demand remains constant, then the availability of labour to employers declines which is inflationary: just what’s not needed when trying to get costs and prices down. So unfortunately work sharing is a questionable policy even in periphery countries suffering from austerity.

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