“If you’re not confused,” mused management guru Tom Peters, “you’re not paying attention.”
Given the single-minded intent behind many government regulations, human policymakers sometimes fall asleep at the wheel. Unintended consequences, for example, are reflected by an Endangered Species Act that sometimes encourages extinction, car safety regulations that cause more pedestrian deaths, and anti-venomous snake policies that increase their population.
As governments seek to lower unemployment, however, shorter workweek policies may repeat previous errors.
A glaring red flag is how simple the proposed solution seems to be: Proponents of work-sharing believe an economy requires a fixed amount of work to be performed by a limited number of people. High unemployment, they contend, is due to allocating too many hours to current employees. A more equitable redistribution of work hours, according to this logic, may diminish unemployment: Instead of Alex and Chris working 45 hours a week and Jo being out of a job, each can work 30 hours, eliminating unemployment.
Fortunately, this analysis doesn’t have to be hypothetical, as many countries have already deployed this logic to justify work-sharing programs. Exploring the likely — often unintended — consequences using economic analysis puts this into perspective.
A fundamental principle is that when firms compete for workers, wages are determined by productivity. If a worker’s productivity exceeds the wage, then hiring workers is profitable; firms will continue hiring until they run out of workers. This will cause the wage to increase as firms try to poach each other’s employees. Once wages equal productivity, they’ll stop rising because firms won’t engage in loss-making hires.
While some sectors are characterized by limited competition for workers (NASA is probably the only employer at an astronaut job fair), for the most part, workers have the opportunity to look for jobs with other employers, which brings wages in line with productivity.
Disruptions to work hours, such as work-sharing programs, have consequences for productivity: If you work 40 hours per week, the first 20 hours that you give your employer are probably far more important to the organization’s output than the last 20 hours. According to compensation theory, productivity changes result in wage changes (usually an increase in the case of work-sharing), affecting the attractiveness of new hires. Restrictions on hours also affect workers’ wage demands as their total income-making capacity is altered.
In contrast with an elementary work-sharing analyses, the real world reveals that there isn’t a fixed amount of work to be done. The total demand for labor depends upon how it’s restricted or divided.
Basic work-sharing arguments also view unemployed workers as clones of the employed who are simply and unfortunately denied jobs. Yet in practice, we find that the unemployed are more likely to have skills poorly tailored to the needs of employers, rendering them as potentially ineffective replacements for the current employees whose hours have been forcibly cut.
In the case of complementary jobs, work-sharing can actually increase unemployment: A parent-lawyer working 60-hour weeks needs to hire a nanny; capping the lawyer at 35 hours will decrease or eliminate the lawyer’s need for a nanny — and his or her ability to pay one. Moreover, the nanny isn’t qualified to be hired by the law firm to make up the hours shed by the lawyer.
Economists examining real work-sharing experiences have found mixed results, such as small increases or decreases in unemployment, but never a substantial decrease. The theoretical musings help us understand why: In most cases, potentially higher demand for workers is tempered by higher wages, induced by changes in productivity and worker demands. Small effects are sometimes due to non-compliance, as adversely affected employers and workers scramble for workarounds, by exploiting loopholes, or by lobbying government for exceptions. Factor in the burden of additional paperwork and the cost of limiting the hours of uniquely talented workers, and the case starts to look quite weak.
In addition to demonstrating that work-sharing schemes don’t promote employment, the international data also tell us what does: free labor markets, meaning low payroll and income taxes, low unemployment benefits and deregulated product markets.
Policymakers and workers have, however, long feared labor market dynamism, despite it going a long way toward explaining the United States’ 5 percent unemployment rate versus the sclerotic Eurozone’s 10 percent. Yet “those who do not move,” as Rosa Luxemburg once remarked, “do not notice their chains.”
Omar al-Ubaydli is an affiliated senior research fellow at the Mercatus Center and an affiliated associate professor of economics at George Mason University. He wrote this for InsideSources.com.