Ifo Viewpoint No. 59: Why Extending Working Hours Will Create More Jobs
18 November 2004
How can more jobs be created if we work longer for the same money? This question is currently a subject of debate. Is the unions’ claim correct that businesses will then decide to do the same amount of work with fewer people and dismiss the unneeded workers?
This is not the case. With longer working hours, the productivity of individual employees increases. Since per-capita labour costs do not increase, it is profitable for businesses to employ more people. With shorter working hours, there are good workers who are kept outside the factory gates because their work does not completely cover what they cost. When the working time is increased, many of these people would become profitable for a business because they would now offer more than what they cost. They would find employment because in this way businesses would manage to increase their profits even more than only from the additional extra work of its present staff.
Some argue that a resulting increase in employment is not evident in economic theory. On the one hand, the extension of working hours without wage compensation will lead to lower labour costs per hour. This increases the demand of businesses for man-hours. On the other hand, more hours are being supplied. It is not proven, they maintain, that the net effect is positive, i.e. that the additional demand for hours exceeds the supply. However, this fear is unfounded, because, as the argumentation in the preceding paragraph shows, the theoretical effect is unambiguous. If we look at the number of people instead of the number of hours, it is immediately clear that the result will be an expansion in employment.
In economic terms, an expansion of working hours is exactly the same as technological progress that increases the productivity of every individual person given the number of working hours. Whoever argues that an extension of working hours will lead to problems must also argue that such technological progress does the same thing. One cannot, on the one hand, argue for innovations, which increase the productivity of labour and contribute to safeguarding jobs in Germany, and, on the other hand, reject an extension of working hours with the argument that this leads to dismissals. The two positions are mutually contradictory.
At its core, the fear of dismissals after an extension of working hours is as old as the fear that technological progress destroys jobs. This fear was already expressed during the German Weaver Revolt in the nineteenth century. It was ungrounded, however. Capitalism transformed the technological progress of the past two centuries not into mass unemployment but into a tremendous increase in the standard of living, and it did that although the aggregate number of working hours increased.
The extension of working hours will also bring about a similar increase in the material standard of living (which is no contradiction to the loss in leisure time and the associated loss in utility). Except for factories that already work in three shifts, machine times can be increased and the use of available buildings can be improved. It is almost like a divine reward for the additional work in form of an increase in the capital stock. The result is an increase in GDP virtually in line with the percentage expansion of working hours. A tremendous boost to growth is the result.
But, the reader may ask, where will the demand for the additional production due to the increased working hours come from? It will come from two sources. Firstly, the unit cost of production will fall because of the higher productivity of the workers. This will enable businesses to sell their products and services more cheaply. Demand is higher if prices are lower.
Secondly, the additional supply of products in itself creates demand. A market economy is an exchange economy. Whoever offers something is at the same time a demander of something else. In concrete terms, businesses whose profits increase because of the expansion in working hours will have an increased demand for other goods and services. They will not hoard these profits like Dagobert Duck but will spend the money on consumer or capital goods. Possibly they will also invest their profits in the capital market, which enables other enterprises to buy more capital goods. In any case the additional spending power equals the value of the additional products and services supplied up to the very last cent.
Of course, the spending power will not express itself in purchases from one’s own company but will be distributed throughout the rest of the economy. From a private business perspective, the effect is thus negligible. But from an economic perspective it is important, because it prevents prices from having to fall in order to generate the additional demand.
Basically demand from an extension of working hours will rise by the same amount as the supply increases. To be sure, structural divergences between increased demand and increased supply can occur. However, such structural divergences lead to changes in price structures which in turn adapt the demand structure to the supply structure, but there are no systematic price reduction effects.
Admittedly the process could involve some leakage in demand, since a portion of the additional demand may shift to foreign providers. With flexible exchange rates, this would lead to a devaluation to the point that sufficient demand for domestic products is restored. Within the euro countries, where no exchange rate adjustments are possible, the result is a lowering of the rate of inflation below that of the other countries so that in this way a possible demand gap can be closed. Since German businesses spend their profits primarily on capital goods and since Germany is a country that specialises in precisely these goods, effects of this kind are likely to be small.
In order for as many businesses as possible to experience a substantial demand effect, it makes sense that all extend their working hours simultaneously. Then, the average business will have as much additional demand as it supplies in addition. For this reason politicians should not hesitate to tackle this issue and should initiate a concerted effort of all participants with the goal of a general expansion of working hours. Flexible solutions for individual businesses would be less helpful in this case.
Professor of Economics and Public Finance
President of the Ifo Institute
Abbreviated version published under the heading "Warum wir länger arbeiten müssen", Welt am Sonntag, No. 46, November 14, 2004, p. 26.