Economic Fallacies: Is It Time to Work More, or Less?
This opinion piece first appeared in The Guardian on January 10, 2012
Economists are fond of pointing out fallacies in economic logic, and unorthodox economists are especially fond of the sport. Adam Smith's famous maxim that the self-interested behavior of individuals produces the common good is one widely-held fallacy. It was spectacularly debunked by the selfish behavior of the 1% who crashed the world economy in 2008.
Keynes' fallacy of composition is another well-known example of debunking. Standard thinking holds that if people try to save more in order to cope with stagnation, that will lower interest rates, spur investment and create more jobs and growth. Keynes showed that higher saving in the absence of sufficient demand would actually lead to reductions in investment, a contraction in output, and, in the end, less benefits from saving for the thrifty.
There's another analogous fallacy going around, which is that hard times should lead us to work longer and more intensively. A new economics foundation conference I'm attending in London this week will take up the question of working hours. Should wealthy countries be thinking about raising or lowering hours of work?
On the face of it, the work intensification approach makes sense. The downturn has reduced incomes and growth. For the individual, trying to work more is sensible – future conditions in the labour market are more uncertain. Expected future returns on financial assets are lower. Housing prices are deflating. For a nation experiencing relative decline, putting its nose to the grindstone makes intuitive sense.
But acting this way en masse risks triggering forces that operate in the other direction. Right now we're experiencing glutted labour markets, in OECD countries as well as globally. Labour economist Richard Freeman estimates that over the last decade, the effective global labour supply has about doubled, from 1.46 to 2.93 billion. If people offer more hours to the market, wages fall and unemployment rises. Excess supply of labour also undermines investment and innovation, which accelerate when labour is scarce relative to capital.
Lump of labour! Lump of labour, the critics will cry. That's the supposed mistake of economists like me who call for reductions in work hours during times of high unemployment. The critics believe the market can always provide enough work for whoever wants it.
But are they right? There's little question that most of the OECD now finds itself in a Keynesian world of weak aggregate demand, ineffectual monetary policy and investor pessimism. And reducing budget deficits makes these problems worse. Corporations are sitting on enormous cash reserves, unwilling to invest them, which means that falling wages won't clear the labour market and lead to more employment.
In the models of neo-classical economics times like the present are assumed away. But when we're actually living through them, we need to recognise that measures that result in higher hours can be counter-productive by creating more unemployment and investor pessimism. Similarly, responding to shortfalls in pension programs by asking people to stay in the labour force more years further dis-equilibrates the market by creating more demand for a limited number of jobs. Sometimes there are impediments to job creation, and we happen to be living through one of those painful periods.
For most of the last 150 years, the nations of the global north have kept their labour markets in balance partly by continuous reductions in hours of work. These increases in leisure time have been funded by higher labour productivity. But recently, the US, Japan and the UK have done far less of this than other wealthy countries. In the States, hours have actually risen, which is part of why unemployment and underemployment are so high. Worktime reduction has become another causality of the wrong-headed economics of austerity. It's time to change that, and to recognise that when it comes to hours of work, less is actually more.