Working time reduction for income redistribution and nothing more

I like Timon’s provocative monthly proposals very much! Not necessarily because I agree with them (I don’t) but they are always inspiring.

Timon is arguing that a reduction in individual working time would on the one hand increase total employment and at the same time increase the marginal product of labor and hence wages. So my first question would be: Why not restrict individual working time radically, let’s say to one hour per day. According to Timon’s logic that should radically increase employment and wages. Something must be wrong here.

I don’t know why Timon thinks cutting individual working time increases the marginal product of labor. I thought that the MPL depends on total hours worked not on who works them. It is not clear to me why the MPL should rise if you have 8 people working 35 hours instead of 7 people working 40 hours per week.

Moreover, if it were true that dividing working time among more people would increase productivity, why isn’t it already done? Surely profit-seeking employers wouldn’t miss out on the opportunity of getting more output with the same total work hours.

If the working-time reduction didn’t raise productivity, there wouldn’t be any effect on total employment when measured in hours worked. If MPL stays the same, a firm who used to employ 7 people for 40 hours now hires one more when individual working-time is cut to 35. But total hours worked will stay at 280. Only if the marginal product is raised will the firm increase its demand for work hours.

You might say that what counts from a welfare perspective is the number of people employed rather than the number of hours they work. But I doubt it. If there is no effect on MPL and hence on wages, going from 40 hours per week to 35 results in fewer unemployed workers, which increases the income of those hitherto unemployed, but it also results in lower income for all others. Aggregate income wouldn’t change since total hours worked wouldn’t change. What happens is a mere redistribution from those currently working to those currently unemployed.

Timon goes on to say that “less loaded workers are healthier and more likely to invest in their training and education.” Well, that may be right given the same income. But the workers whose working time is cut, will have lower income. So they will have less money to spend on health care and education.

In short, I doubt that individual working-time reduction would increase productivity. If it doesn’t increase productivity, it will raise the number of people employed, but not the number of hours worked. So its only effect is income redistribution within the working class. Is that the kind of redistribution Timon wants?

Monthly Proposal No.2: reduce daily and weekly working time for efficiency and flexibility

To face and fear an ongoing rise in unemployment is definitely not a new issue for European governments. The same can be said about economic crises. But still there is an unusual heat in the recent corresponding political debates. Why?

On the one hand, there is still no sign for a substantial as well as sustainable upswing. On the other hand, the discussion about the excessive public debt sensitized voters to the affordability of the welfare state. So on aggregate level, the scope for compensating public measures gets more and more restricted.

However, an awakening also takes place on an individual basis. Partly, this is because an increasing share of people becomes aware of the fact that persistent unemployment is not an unlikely individual fate anymore. Furthermore, the presence of these fates in the media or even the neighbourhood additionally sensitizes them to the fact that public transfers alone are just a short-term solution and do not compensate for all the sacrifices and dependencies of the unemployed or even poor anyway.

Facing this strain many of these people work extra hours and burn themselves out, while others get sick by being excluded. In this sense, labour markets incorporate another dimension of unequal distribution. It can be argued that this exploitation of overworked employees on the cost of the unemployed rest is inefficient too.

Taking a normative perspective, one just could say, that there are no winners among allworkers. While the unequal distribution of wages favours one worker against another, in the end the unequal distribution of working time seems to just reinforce the market power of firms. Taking a more positive perspective, one could add the argument that with additional working hours, productivity decreases. Reducing the former should therefore increase average as well as marginal output per employee. Also, less loaded workers are healthier and more likely to invest in their training and education.

After all, in the long run even the economy as a whole will benefit from a lower and stricter boundary for contracted hours. Splitting the portions and increase the availability of them should even favour the flexibility of their use, corresponding services and their consumption. Stop arguing with old fashioned assumptions about preferences and competition. Get serious, rethink welfare, consider sustainability and reduce daily and weekly working time!

The Mystery of the Falling Natural Real Rate of Interest

A couple of weeks ago Larry Summers held a widely praised speech on the difficulties ahead for economic stabilization policy. As far as I can tell, not much of it was really new, as also pointed out by e.g. Krugman, but that does not mean it wasn’t a great speech, and one that seems to have had considerable influence on the policy debate. In essence it boils down to the problems we face due to the zero lower bound on nominal interest rates, and what happens in a world where the real interest rate required to establish full employment, sometimes also called the natural real interest rate, is negative, as it almost certainly is right now.  Yet from the regression’s I have been running, it would seem that the equilibrium real interest rate was already considerably lower than in previous periods even before the crisis started. In other words, even before the crisis struck, monetary policy already had considerably less room to maneuver than in the decades preceding the the 2000s. To recap, let’s again take a look at a fairly simple Taylor rule one might use to describe Fed policy in the 2000s, more precisely from the first quarter of 2000 to the second quarter of 2009, which is roughly around the time when the zero lower bound started binding.

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