Monday, 9 July 2012

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.



  1. Your NAIRU idea is quite flawed. NAIRU implies that there is a BROAD demand for labour which puts pressure on BROAD wages and therefore BROAD prices. But BROAD means that it is still NOT difficult to find NEW employment. Therefore there is NO reason for wage pressure and price pressure until we reach almost FULL employment.

  2. I find your comment incomprehensible. You'll have to enlarge on it. What do you mean by t he word broad?

  3. Inflation is a broad measure of changes in consumer prices in the whole economy. In order for wages to create pressure on consumer prices the wage growth has to be broad, that is in the whole economy. If this wage growth is due to real demand for labour, then obviously this demand exists in the whole economy and that means for all types of labour. If it is a demand for all types of labour it is difficult to argue that as employment rises it becomes difficult for employers to find employees. Which employees and which employers? As long as there is unemployment one can argue that there is a broad supply of labour to match a broad demand for it.

  4. I flatly disagree with the idea that “As long as there is unemployment one can argue that there is a broad supply of labour to match a broad demand for it.” What about if there is a total of just one thousand unemployed individuals in an economy like the UK’s with a total of about 25 million employees? In that scenario it would be virtually impossible for any employer to find anyone with the right skills or experience to fill any given vacancy.

    In fact I’d go a lot further. It is very hard to say at EXACTLY what level of unemployment labour shortages become serious: it depends on what is meant by the word “serious” etc etc. But I’d guess a million might be about the right number.


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