Tuesday, November 17, 2009

Paying People to Work Shorter Hours

Take a business with say forty employees. The company is offered 5 per cent salary directly paid to them provided they shorten the working week of their existing employees and continue to pay them the same salary. This reduces the incentive to lay workers off and may lead to hiring. A short article by Dean Baker proposing this is linked below. It has got some traction including being mentioned in the NYT by Krugman and even made a brief appearance on the hallowed irisheconomy.ie stage. It would be good if people can think about this. If there is any result that has emerged from the linkage of economics and psychology that is robust, it is that unemployment is destructive of human potential in every wage imaginable, damaging health, psychological well-being, creativity and creating intergenerational effects that are likely very large even if we don't fully account for network and wider social effects. More debate about how society should handle labour market fluctuations is needed. This is one idea and hopefully we can start discussing properly many more, informed by what we are starting to learn about the interaction of psychology and the labour market.

link here

"Germany has used this policy to keep its unemployment rate at 7.6 percent, about the same as it was before the recession. Imagine if workers in the United States, like workers in Germany, were dealing with the recession by putting in four-day weeks (while getting paid for five) or getting an extra two weeks of paid vacation. This sure beats being unemployed."


Kevin Denny said...

I am a bit puzzled: this amounts to increasing hourly wage rates by 20% funded by the tax payer. Doesn't sound right to me.

Liam Delaney said...

Sorry if I described it badly. The workers get an hours reduction so yes they do end up with an effectively higher hourly wage funded by the taxpayer. However this also, in theory, means the firms hire more for a given labour demand or at least lay off less workers. Let's make sure we understand it to mean the same thing before debating it. The basic idea is to save on unemployment costs by subsidising job sharing.

Keith O'Hara said...

And the opportunity costs of such programmes are? What's to stop this being abused by firms? How about the loss in specialisation by existing workers that are displaced, and slowing the transition of workers from dead industries?

Kevin Denny said...

Might be worthwhile. One would expect some output loss as the elasticity of output w.r.t. hours is higher generally than w.r.t. people. At least that is what I remember from stuff I read about 20 years ago (sigh). It depends on the occupation of course.
The argument in favour, I suppose, is that the social costs of having 1 in 5 unemployed is greater than having all 5 underemployed by 20%. For particular populations this may well be true.
In working out the merits of such a scheme one would need to do a cost-benefit analysis (back of the envelope maybe). This needs to be distinguished from the costs & benefits to the Exchequer which is what the policy-makers will be focused on, understandably.

Liam Delaney said...

- opportunity cost depends on the deadweight loss. in some scenarios it would be zero if employers replaced directly and this stimulated spending and activity though this is optimistic. We are currently spending 5 billion on unemployment benefit and effectively obliterating the human capital stock of the country. What is the opportunity cost in that?

- the employer abuse is clearly something that would need to be thought out closely. applies to any arrangement that offers money in exchange for a behaviour.

- the slow transition argument seems less important here but willing to be convinced otherwise. This would clearly be a temporary (two years max) measure to attempt to bridge the labour market.

Keith O'Hara said...

Say you pay someone to take a holiday to allow someone else do exactly the same job: skills are retained and, when the economy turns around, the workers don’t have to be retrained; this seems to be the main argument promoting such policies. What if the human capital stock we’re trying to preserve has zero net-PV? To finance projects like this we’re borrowing at real rates of about 10% per-year—this will be financed by a reduction in PRSI payments in Ireland, yes?

Where would policies like this be most effective? Well, why not the sectors that have lost the most number of jobs? i.e. sectors with the greatest slack in labour supply and where the depreciation rate of human capital is greatest. Construction appears to be an apt example; the last QNHS shows approx. 80,000 jobs lost in construction over 12 months. The monies subsidising these workers is borrowed at 10%, and when the two-year (or so) programme ends, the person still needs to be retrained because the construction industry won’t revert to 90,000 houses per-year. The capital stock you’ve preserved is useless and you have a bill, with interest, to show for it. You've just delayed an inevitable period of retraining.

The government spent money shovelling people into FÁS programmes & apprenticeships, they're now paying for those same people in an generous social-welfare system. I don’t really know if you can use that as an argument for more government intervention, Liam!

If these policies were focused on ‘growth industries’ (whichever they may be) then I guess you could work it out to be a positive. The problem I have is that the author of the article you linked mentioned nothing of the costs, except to say it’s cheaper than the stimulus package. By that same logic, when the $250,000 per worker bailout of the auto industry is juxtaposed against the stimulus figure of $100,000, shouldn't we just have another stimulus package?

Something I've wondered: how does one measure ‘jobs saved’? It appears to be a highly subjective measure and I don't remember it being a feature of any economics class in UCD...

Liam Delaney said...

Keith - if net PV was zero then any intervention would be wrong. It simply is not zero. We don't know what it is but it is considerably more than zero even from just a basic human level. Look e.g. at the Bell and Blanchflower references for the countless studies on things like hyseteresis showing causal effects of keeping people in employment.

I don't have a love of this particular policy but it is in the right direction. We are spending 5 billion on UE payments at present. There is no gain to anyone from this. We are looking for policies that try to leverage this five billion while having people working in areas that will allow them some chance of participating in a post-recession economy.

We haven't even started looking at all the alternatives yet. Kevin mentioned jobs vouchers and I will post on these soon. Direct deployments including to schools, hospitals etc,. also need to be seriously looked.

Agree that comparing value against very expensive alternatives is not a legitimate argument. However, I think it is legitimate to look at the current status quo in Ireland (5billion in Unemployment Payments) and begin to ask whether some of these alternatives could be better/

Kevin Denny said...

Keith I don't know when you studied in UCD. I used to teach labour economics at BA & MA level. I did a lot on unemployment but then when unemployment disappeared it seemed kind of pointless so I stopped.

These policies are hard to get right but there is also a cost to doing nothing so no easy options. Picking winners is always hard also. But there may be some generic skills that one could start with.

Liam Delaney said...

i think keith is basically correct that most economics taught at degree level makes assumptions about how labour markets clear that make it difficult to think about how intervention has effects. I know labour economics would certainly go into some of this stuff but in general, its a fair enough point that we have been left a little short in the current crisis with many of the intervention calls coming from traditional hydraulic keynesians who would bury banknotes for people to dig up if they thought it would get the show back on the road. I certainly agree with the basic point that any jobs stimulus should be aimed optimally at the recovery.

Keith O'Hara said...
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