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It’s Time to Reconsider Shorter Work Time

Thinking Outside the Box for the President’s Summit on Employment

by William McGaughey

Economists, including Fed Chairman Ben Bernanke, predict that job growth will be slow as the U.S. economy pulls out of a recession. Bernanke noted that gains in labor productivity have been exceptionally large as employers cut payrolls and force the remaining employees to handle more work. They will not hire or recall employees until driven by a fear of labor shortages.

This observation calls attention to the fact that, given constant levels of hours and gross domestic product (GDP), productivity and employment gains are inversely related. The basic equation that governs the labor market is: Output equals productivity times employment times average hours of work.

To put the job market back on a sound footing, we need to understand the impact of technological innovation upon consumer markets and jobs. Technological innovation has two principal benefits for employers: First, it creates new products satisfying new consumer wants and needs. As new products are introduced to the consumer market, sales and profits increase. Second, technological innovation helps employers produce at a lower cost. Machine production displaces human labor so that the same quantity of goods can be produced in an hour with fewer workers. The technical term for this is increased labor productivity.

Let us focus on the second benefit, which is not so beneficial from the standpoint of the workers displaced. Over the years, there has been a large progressive gain in labor productivity. Keep in mind that these are more or less steady gains, not productivity levels that fluctuate over time. If the levels of output and average work hours remain the same, employment will necessarily drop.

Obviously, that has not happened. Yes, we have a level of unemployment exceeding ten percent (and perhaps in the fifteen percent range if employment definitions were different), but nothing like what would exist if the output and work-time variables remained constant.

In 1989, former U.S. Senator Eugene McCarthy and I published a book titled “Nonfinancial Economics: The Case for Shorter Hours of Work”. We viewed trends in each of the four variables and reached the following conclusions: Between 1947 and 1986, labor productivity increased by 2.439 times. Meanwhile, output rose by 3.536 times, employment rose by 1.707 times, and average work hours in 1986 were at .85 times the level in 1947. The labor equation (output = productivity x employment x average hours of work) had to remain in balance in each year.

Trade unions in the 19th century argued that, as labor productivity increased, there had to be a commensurate reduction in work hours to maintain levels of employment. I think that view is correct. On the other hand, employment has basically been maintained without a reduction in hours. Ten percent unemployment is painful to many but is not catastrophic. That is because output, or Gross Domestic Product, has also increased significantly over time.

Back in 1960, when automation threatened jobs, John Diebold told the Joint Economic Committee of Congress: “Unlimited demand for goods and services will prevent unemployment from automation. Since human wants are unlimited, increased productivity and production will find a market in satisfying these wants. Through greater productivity earnings will increase to such an extent that there will be a tremendous rise in our standard of living.”

Ask yourself honestly: Has that happened? Your gut reaction would be: No, the living-standards utopia predicted by Diebold fifty years ago has not materialized. And yet, the statistics of output seem to bear out his prediction. If you divide the gain in output between 1947 and 1986 by the gain in employment, you get something like a two-fold increase in output per employee, suggesting that each worker in the United States was twice as prosperous in 1986 as in 1947. Is that conclusion reasonable?

Growth in Economic Waste

Senator McCarthy and I did not think so. There was something wrong with the output figures. Though it is hard to put your finger on the problem, it seemed that not all output was the same. Some was output that was wanted and needed by people, and some was unnecessary and unwanted output which we called “economic waste”. The main part of our book was devoted to cataloguing the varieties of waste.

“ Good” output, so to speak, is that which contributes to human happiness and material well being. The traditional formulation of what people want and need encompasses “food, clothing, and shelter”. If the increased output went into enhancing those three types of products, then increased GDP might be an accurate reflection of people’s increased material well being. Even if it went into new kinds of material satisfaction such as entertainment and personal transportation, we would not quarrel with the GDP definition.

But we do quarrel with the definition. That is because the growth sectors of GDP have less to do with material well being but with something that might be called “necessary evils”. Let’s use the military as an example. Expenditures for armaments do not advance human happiness or well being. But we do spend money on this type of function because we think we have to do so to avoid a greater evil. We build up our armed forces to repel expected enemy attacks. If we did not anticipate such attacks, we would not have a large military force. And, in truth, the world would be much better off if there were no enemies and no military expenditures but people in all nations just sat back and relaxed.

At the present time, the two main areas of employment growth are in the fields of education and health care. In their current growth mode, both illustrate the type of wasteful spending that I mentioned. Both industries have powerful special-interest groups that plead the virtues of their service: It is good to spend on health care so people will be healthy. It is good to educate young people so they can satisfy their natural curiosities, acquire knowledge, and become more productive members of society.

The truth is, however, that it would be better if people remained healthy through sound living habits than by consuming products of the health-care industry. I would argue that pumping large number of pills into patients actually makes them less healthy even if some doctors and pharmaceutical companies argue otherwise. The U.S. health-care system displays a number of perverse incentives that serve to drive up costs and claim a greater share of GDP.

The same is true of education. Given certain basic skills, people can function quite well in today’s jobs without prolonged education. However, young people spend more and more time in school not because they “enjoy learning” but because they think they need the credentials to find better jobs. The increased competition for jobs drives up the level of credentials required. And, of course, the various professions will keep raising the bar for certification to keep newcomers out of the field and maintain wages for incumbents. So the requirement for increased education seems endlessly elastic.

When I came to Washington recently, I was handed a publication of the Washington Post called “Express” in the subway for October 9, 2009. There was a section called “Express Marketplace” filled with classified ads for various items. The “jobs” section had twelve column inches of advertising. Next to it was a section titled “career training” which had fifty-three column inches of advertising. Jobs were evidently quite scarce in comparison with the opportunity to spend one’s money on career training. And that seemed to me to illustrate the way the economy was going: The tail was wagging the dog.

When I looked at the relatively few jobs that were advertised, I did not see too many of those advertised in the “career training” section. In fact, I did not find many that required much education. The most space was given to an advertisement by Mountain State University which was offering employment to military recruiters in the Washington, D.C. area. Yes, the U.S. armed forces did have some employment opportunities but it was difficult to find willing applicants. More recruiters had to be hired. Another ad that caught my eye was “DANCERS ... wanted for gentlemen’s club ... no experience needed.” Good money was being offered - $300 to $500 a night - for young women with little preparation or experience. Again, it illustrated how the economy was going.

My general conclusion is this: Per-capita demand for the basics - food, clothing, shelter, etc. - is relatively inelastic. Gains in productivity in those industries push employment out into areas whose products are less useful to human beings. Some are gatekeeping functions - e.g., educators screening those who will assume the better jobs - and some are necessary evils - e.g., criminal-justice professionals who process criminals - but the functions themselves are a product of how things have gone in our particular society rather than a consequence of authentic human need. The government can continue to pursue policies that displace human labor increasingly into such areas. But should it?

I could go on at some length to catalogue how U.S. economic growth is driven by wasteful activities as the book, “Nonfinancial Economics”, did. While the dollars spent on various products may be the same, the products themselves are quite different. In fact, it would be better if some of them did not exist. And that was the point of our book. We could have full employment and a comfortable standard of living for most people if GDP were smaller in financial terms. If employment and production shifted to the truly useful kinds of products and away from “necessary evils”, we would all be better off. That might have happened if, instead of GDP gains, work hours had been reduced.

The Work-Time Alternative

Back in the 19th century, working men and women organized around the purpose of reducing work time. The great May Day strike of 1886 sought to achieve an eight-hour work day. The record shows that that the average workweek in the United States decreased significantly in the second half of the 19th century and first half of the 20th century but has since remained static. Bureau of Economic Research statistics report an average workweek of 53.7 hours in 1890, 49.8 hours in 1920, and 41.2 hours in 1950 - a reduction of about two hours each decade, on average, during this time.

Since 1950, however, progress has slowed. The ”Household Series” compiled by the U.S. Census Bureau and Bureau of Labor Statistics show that the average workweek in the United States dropped from 41.7 hours per week in 1950 to a low point of 38.7 hours per week in 1975. It then rose to 39.2 hours per week in 2006. The average reduction during this period was about 0.5 hours each decade on average. The trend did not indicate further progress.

This period of time roughly coincides with the decline of the U.S. labor movement, at least, in the private sector. Labor unions were the driving force behind shorter workweeks for many years. After World War II, the unions ceased to be so ardent in their desire for leisure? Why? Likely it is because many members of labor unions have preferred to work longer hours and receive overtime pay than to avoid overtime and enjoy more leisure. Because overtime work generally received time-and-a-half pay under the Fair Labor Standards Act, there was a perverse incentive for employees to work longer hours. Employers found squeezing more work out of their existing employees to be a convenient tool to control labor costs especially as employee health-insurance costs rose.

Fifty years ago, when Eugene McCarthy chaired the Senate Special Committee on Unemployment, it was thought that the question concerning shorter workweeks would be decided by the balance of power between the business community and organized labor, with government being a neutral force. In fact, labor, which lost its focus on hours, has subsequently shrunk in power relative to the other two parties. Business has remained adamantly opposed to shorter workweeks since they interfere with growth of short-term profits. Government, too, opposes them because they interfere with tax collections. Symbolically, the desire for shorter workweeks seems equivalent to personal laziness. “Great” people are hard-working people, who are imbued with the work ethic. We Americans are not like the decadent French.

But this is all a fairy tale. The French and other Europeans do, indeed, enjoy more leisure, either in the form of shorter workweeks or longer vacations, than Americans. I would argue that they are relatively sane. Those Europeans have invested far less than we in military obligations and have sustained fewer casualties. Their public health-care systems deliver more for a lower cost. The pursuit of happiness seems more a national goal in those nations across the Atlantic than in ours. We have our sight on other ends. I think Lyndon Johnson may have tipped his hand when, as a U.S. Senator, he commented on the shorter-workweek proposal: “Candor and frankness compel me to tell you that, in my opinion, the 40 hour week will not produce missiles.”

Another insidious influence working against shorter hours is that since the 1930s the U.S. government has incurred significant debt in the course of its operations. The government needs to maintain the flow of tax revenues to keep its budget reasonably in check. Even if much of U.S. production is of a spurious nature, there are dollars attached to this income which can be taxed. Financial officials within the federal government will likely argue against proposals that threaten this income even those which benefit working people and Americans in general. Money, however, is fictitious. One would think that the well-paid experts in the financial sector could find someone in their ranks who could figure out a way to coordinate the real needs of Americans with the need to service the money bubble.

The nations across the Pacific have been held up to Americans as examples of hard-working people, willing to work long hours, who would eat our lunch if we did not do the same. First, it was the Japanese whose workers sometimes died from working long hours. They would and did eat our lunch. Then, unexpectedly, the Japanese government set about methodically reducing the time its workers needed to work and developed corresponding facilities for leisure.

The Chinese were the next economic threat to come along. More and more products consumed in the United States were produced in sweatshops in southern China. Another nation of workaholics? Forgotten in all this is that China made a major move toward shorter work time when the People’s Congress enacted the forty-hour week, eliminating half-day work on Saturdays, in 1995. The Chinese nation did not subsequently incur a trade disadvantage but, in fact, became a strong competitor in world markets.

And now an official, Zhang Xiaomei, has proposed that China move to a 4.5-day, 36-hour workweek to improve the quality of life for working people and relieve the unemployment problem. China aims to create 9 million new jobs in urban areas to keep the registered unemployment rate under 4.6 percent.

Studies show that hours reductions in a country often lay a foundation for future prosperity. Former U.S. Senator Paul Douglas showed the real relationships between leisure and income in his book, “Real Wages in the United States: 1890-1926”. A French economist, F.S. Simiand, had found, contrary to expectations, “a negative relationship between wages per hour and the number of hours worked” in the French coal-mining industry. Workers tended to earn more per hour when they had more leisure. Douglas’ study showed that the same pattern held in U.S. industries in the period between 1890 and 1926. At the time when U.S. industry was gaining steam, U.S. workers were also gaining more leisure.

Conventional wisdom holds that a tradeoff exists between income and leisure. It is not so, at least not in the long term. That is because the law of supply and demand dictates that prices rise when supply shrinks. This is true of the labor market as in the market for other commodities. Reduced work time shrinks labor supply expressed in terms of worker-hours. Wages take care of themselves. For this reason, we can have adequate wages for working people without wage regulations if work time is reduced.

How can work time be reduced? It can be done, of course, through collective bargaining between worker and employers. I think it unlikely, however, that unions will take up that cause if many of their members prefer overtime work. Another way is for the federal government to reduce the workweek by amending the Fair Labor Standards Act.

In the early 1980s, Rep. John Conyers of Michigan introduced a bill in the U.S. House of Representatives which proposed to reduce the standard workweek (the point at which overtime is paid) from 40 to 32 hours over an eight-year period, increase the overtime rate from time-and-a-half to double time, and prohibit mandatory-overtime clauses in labor contracts. Thus the federal government might create incentives for employers to reduce the workweek and perhaps hire more workers to avoid overtime costs. The political climate then did not favor that approach.

I would argue that in addition to amending the Fair Labor Standards Act in those ways, the federal government should impose a special tax on overtime earnings - even to the point of confiscating them - so that working hours beyond the standard ceases to be attractive to employees. The premium wage should simply be paid to the government. Since neither employee nor employer would want that, both would have an incentive to switch to shorter work schedules. But, of course, there are other factors to consider such as health-care costs, exempt or nonexempt status under the Fair Labor Standards Act, and effective enforcement of the law which would also need to be addressed.

In a Global Context

Shorter workweeks work their magic in the context of a closed economic system. Traditionally, this has meant national economies. In a global economy, however, national economies are not closed. That creates a problem. If work time is reduced in one industrialized country but not in another, multinational business may take this as a sign of a “poor business climate” and move production to the country with the longer hours. Therefore, we need to begin thinking of how to reduce work time in many nations simultaneously. If nations can work together to control greenhouse-gas emissions taking national differences into account, they can also work together to maintain employment and employment standards.

I have developed the concept of flexible tariffs targeted specifically to employers rather than to nations. This would mean abandoning free trade and renegotiating the entire trading order to make world trade more friendly to working people and to the environment. National governments could negotiate hours standards based on their respective levels of industrial development and agree to allow penalties to be placed to goods produced for export whose production violates the standards. If the export-oriented businesses scheduled longer hours of work than the national standard allowed, the importing nations would be authorized to impose tariffs that neutralized the cost advantage.

This arrangement would also serve as an incentive to reduce work hours around the world. If employers improved their wage and hours offering, they would reap the advantage of lower tariffs when the goods were sold abroad. Such a system would help us get away from trade disputes between nations and move toward one where national governments (and international agencies such as the ILO and WTO) cooperated in regulating multinational businesses.

The object here is to achieve greater balance in our economic system, moving back toward useful production and away from the gold-plated “waste”. Productivity increases would then serve a more humane end. Whether this is politically feasible in the United States I cannot say. I do consider it economically feasible, however. We would not be in the fix that we’re in if we had chosen leisure rather than armaments (and expensive education, health care, gambling, litigation, credit-card consuming, etc.) fifty years ago. But it’s never too late. The difference is that we now have to consider our policies in a global context.

This scheme is proposed within the framework of the free-market system. It’s as American as apple pie. Individual businesses would continue to set hours and wages in ways that are financially advantageous to themselves. However, the federal government in concert with our new treaty obligations would regulate business to further the goal of full employment and strong and stable consumer markets that will ensure business profits well into the future. Quarterly profits might suffer but, in the long run, the interests of the American people would be served.

I realize that the proposals outlined in this paper are a tall order politically. The first step might be to talk about some of these ideas, both domestically and internationally. And what better place to do that than at a national conference on employment? Our problems will not be solved by reinforcing status-quo solutions but by thinking outside the box or, perhaps, by revisiting the well-spring of our own consumer market.

Henry Ford said this more than eighty years ago while introducing the forty-hour week in his own plants: “The short week is bound to come, because without it the country will not be able to absorb its production and stay prosperous. The harder we crowd business for time, the more efficient it becomes. The more well-paid leisure workmen get, the greater become their wants. These wants soon become needs. The people who consume the bulk of goods are the (same) people who make them. That is a fact we must never forget - that is the secret of our prosperity.”

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