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February 20, 2017

Reducing unemployment is always on the government agenda

Opinion image

Working hours can be adjusted to achieve this goal. 

The so-called work-sharing concept was popular in continental Europe (e.g. France and Germany) in the 1980s and 1990s, when the agreed working time—the period of time a person spends at paid labor—was reduced. The idea was quite simple: all employees work fewer hours so that more employees are necessary to produce the same output as before, thereby reducing the number of people out of work. However, economic research shows that this policy has not in fact been successful in reducing unemployment. A major reason for its failure being an increase in hourly wages such that monthly income remained constant.

This trend was reversed in Germany in the early 2000s, when several companies increased their standard hours in order to reduce labor costs: if employees work more hours but receive the same monthly income, then their hourly wage falls. In addition, the amount of overtime work undertaken (which is partly compensated by higher wages) can be reduced. Further, due to longer working hours, the length of time capital and machinery is used for may increase, which should increase the demand for labor and stimulate production and therefore boost employment. 

However, there is also a downside to this policy: Can production increase enough to offset longer working time? If all employees work longer hours, then fewer workers are needed to produce the same output, which is the reverse of the work-sharing idea mentioned above. Output has to rise by a certain amount for the required number of staff to remain unchanged; but it has to rise even more in order to increase the number of workers needed. Obviously, the latter scenario is more likely to take place over a longer time period; in the short term, output may not rise (enough). 

Any positive employment effect rests on the rise in total working time and the fall in hourly wages, and the maintenance of a constant monthly income. However, other scenarios are possible. In the long term, worker representatives may push for an upward adjustment of hourly wages. Further, the reduction in overtime may fully offset the increase in standard hours such that workers end up with the same package of total hours and monthly income. In this case, the increase in standard hours has no effect whatsoever.

To summarize, several conditions must be met for an increase in standard hours to have positive effects on employment. Therefore, instead of calling for nationwide working time adjustments, it may be advisable to incorporate flexibility into agreements covering working time to allow firms to take into account the situation at the company level and to deviate (to some extent) from collective bargaining agreements.

It seems at first glance that workers who are already employed before an increase in working time are clearly worse off because they receive the same income but work longer hours. However, reduced labor costs may actually save their jobs, especially in firms under competitive pressure.

Related article:
Employment effects of longer working hours, by Thorsten Schank

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We recognize that IZA World of Labor articles may prompt discussion and possibly controversy. Opinion pieces, such as the one above, capture ideas and debates concisely, and anchor them with real-world examples. Opinions stated here do not necessarily reflect those of the IZA.