Reduce working hours as Germany has done?

Dean Baker recently advocated reduced working hours in The Guardian, and praised Germany for doing so.

I normally agree with Dean Baker, but not this time. The basic flaw in the hours reduction idea is thus.

The ultimate constraint on raising employment is the inflation that arises when unemployment drops to some level or other (which you could call “the economy being at capacity”, but I’ll call it NAIRU). That is, as employment rises, it becomes increasingly difficult for employers to find the labour they want from the ranks of the unemployed, so they resort to outbidding each other for “already employed” labour. And that means inflation.

That constraint probably does not apply at the moment in most countries. That is, employment at the moment in those countries could probably be increased by a straight rise in demand. So even if the NAIRU constraint does NOT APPLY, hours reduction is STILL NOT the best cure for the problem.

But assuming the NAIRU constraint DOES APPLY, a compulsory reduction in hours has NO EFFECT WHATEVER on the number or variety or quality of people making up the unemployed. There is thus NO INDUCEMENT WHATEVER for employers to abstain from bidding up the price of already employed labour or giving in more readily to union demands at that “capacity” or NAIRU employment level.

Thus hours reduction WOULD MAKE SENSE just at the moment for almost every country in the Eurozone APART FROM Germany. That is because those countries are stuck (thanks to the EZ) in a situation where they cannot raise demand.

But Germany, in contrast, CAN RAISE demand to the level where excess inflation becomes a serious possibility. Indeed, many have argued it should go even further and deliberately engineer a few years of excess inflation because, so the argument runs, that would help periphery countries (though I’ve got doubts there).

Ergo hours reduction for Germany makes no sense. It makes no sense for the U.S., U.K. or any other monetarily sovereign country. But it would make sense, to repeat, for most EZ countries other than Germany.


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