Dear Tom:
A masterly analysis. Run for Parliament - the country needs these ideas.
Respectfully,
Thomas Lunde
-----Original Message-----
From: Tom Walker <[EMAIL PROTECTED]>
To: [EMAIL PROTECTED] <[EMAIL PROTECTED]>
Date: February 19, 1999 12:26 PM
Subject: The Prosperity Covenant
>The prosperity covenant: how reducing work time really works to create jobs
>by Tom Walker
>
>A brief presented to the
>Operation JOBS Roundtable
>Vancouver, B.C.
>February 19th , 1999
>
>(This brief is posted at www.vcn.bc.ca/timework/covenant.htm with updates
>and links to come.)
>
>"The harder we crowd business for time, the more efficient it becomes."
> -- Henry Ford
>
>It seems reasonable to suppose that if a company had ten employees who each
>regularly worked four hours a week overtime, the employer could pool those
>hours and hire an eleventh worker, thus increasing employment at the
company
>by ten per cent. Likewise, if long hours are being worked throughout the
>economy, one would expect it to be feasible to spread out those hours of
>work and create new jobs. If this were true, unemployment could be
abolished
>with the stroke of a pen.
>
>"Wrong!" the economists tell us, "that is the lump-of-labour fallacy, which
>assumes there is only a fixed amount of work to be done. And that is
clearly
>a fallacy!"
>
>What is this strange sounding "lump-of-labour fallacy", which insists it
>would be uneconomical to redistribute work time? Why is there seemingly no
>alternative to the same old right-wing, "supply-side" nostrums that have
>brought two decades of rising inequality, enfeebled social programs and a
>crescendo of potentially disastrous financial speculation?
>
>What is the lump-of-labour fallacy?
>
>The lump-of-labour fallacy has been described as "one of the best known
>fallacies in economics." Whether or not that's true, it certainly is one of
>the least understood and the most misused.
>
>As conceived in 1891 by English economist David Schloss, the fallacy of
"the
>theory of the lump of labour" had nothing to do "with the question of the
>length of the working day." Schloss was writing about something else
>entirely -- why workers didn't like piece-rate wages. The phrase, however,
>seems to have struck a chord with editorial writers and authors of
>introductory economics textbooks, who have borrowed it for use as a trump
>card in the debate over work time.
>
>The lump-of-labour fallacy simply says that there is not a "fixed amount of
>work to be done" and therefore one cannot share out such an assumed, fixed
>amount of work. End of story. The argument has nothing to say, in general,
>about whether jobs can be created by reducing the hours of work. It is a
>rebuttal only to a specific, popular simplification. The lump-of-labour
>theory is indeed a fallacy, but so is the use of the fallacy to make a case
>against the job creation possibilities of reduced work time. Technically,
>that common usage itselfs commits several fallacies: "hasty
generalization",
>"straw man argument" and "non-sequitur of denying the antecedent".
>
>The productivity paradox
>
>A better case against relying on reduced work time to cure unemployment was
>argued -- also during the 1890s -- by another English economist, John Rae.
>That argument can be best summarized as the "productivity paradox". Rae
>argued -- and presented an impressive stack of evidence for the case --
that
>workers would probably produce as much or more in eight hours as they
>previously had in nine or ten hours and therefore reducing the hours of
work
>would create no additional demand for labour. On the other hand, Rae
>cautioned, if the workers didn't produce as much as before in the shorter
>hours, labour costs would go up and that would reduce the demand for
labour.
>
>Although it presents a broader argument than the lump-of-labour fallacy,
the
>productivity paradox also has a fatal flaw. It deals exclusively with an
>either/or situation. Thus it presents a false dilemma -- another fallacy.
In
>the actual economy, a properly-designed reduction in the standard hours of
>work would encounter some workplaces where total output per worker could be
>maintained or even increased while other workplaces would see a decline in
>per-worker output, although that decline would usually be less than
>proportionate to the decline in hours.
>
>How reducing work time really works
>
>It is precisely the difference between the effects on output in different
>workplaces that gives shorter work time its power to create jobs. The key
>concepts for explaining how this works are:
>
>1. efficiency
> and
>2. competition
>
>Efficiency and competition are two words that business people like to use.
>They might even seem somewhat off-putting to people whose priorities are
>equity and social justice. So their use needs to be carefully defined.
>
>Efficiency, in the sense we're using it here, means the efficient
management
>of human resources. If the required amount of a product or service can be
>produced or performed safely and comfortably in seven hours' work instead
of
>eight hours, it should be produced in seven hours. There shouldn't be
>bottlenecks or screw-ups to keep people hanging around, getting paid for
>doing nothing. Furthermore, the skills, knowledge and experience of the
>workforce should be used to best effect.
>
>Competition means that well-managed, efficient firms and their employees
>should receive the maximum benefit of their efficiency. Poorly-managed,
>inefficient firms and their employees should not be enabled to shift the
>burden of their excess costs to the public and to the better managed firms.
>
>So, how do shorter hours of work drive efficiency and competition? Setting
>an economy-wide standard for hours of work that is closer to the most
>productive arrangement for the most efficient firms increases those firms'
>ability to benefit from their efficiency. It also makes it harder for
>inefficient firms to pass on their excess costs to the public in the form
of
>substandard wages, wasted skills and knowledge, and stressful long hours of
>work.
>
>If required to match the hours of work of the pace-setting firms, less
>efficient employers will initially have to hire additional workers to
>maintain a given level of output. That is to say, there will be some
>temporary "work-spreading". This will help to absorb the unemployed and
>reduce the social costs of that unemployment. The overall effect would be
to
>reduce the average cost of labour economy-wide even as it increases the
cost
>of labour to the less efficient firms.
>
>But over the longer term, competition will press the less efficient firms
to
>invest in improved techniques and better management. The long-term
>employment gains come, not from the sharing out of an existing amount of
>work, but from the lower costs of production and higher effective demand
>that shorter work times stimulate. The main obstacle to understanding this
>dynamic comes from the stubborn (and completely unsupportable) assumption
>that output increases or decreases in direct proportion to the number of
>hours worked.
>
>That output does not rise or fall in direct proportion to the number of
>hours worked is a lesson that seemingly has to be relearned each
generation.
>In 1848, the English parliament passed the ten-hours law and total output
>per-worker, per-day increased. In the 1890s employers experimented widely
>with the eight hour day and repeatedly found that total output per-worker
>increased. In the first decades of the 20th century, Frederick W. Taylor,
>the originator of "scientific management" prescribed reduced work times and
>attained remarkable increases in per-worker output.
>
>In the 1920s, Henry Ford experimented for several years with work schedules
>and finally, in 1926, introduced a five day, 40 hour week for six days pay.
>Why did Ford do it? Because his experiments showed that workers in his
>factories could produce more in five days than they could in six. At every
>step along the way -- in the 1840s, the 1890s and the 1920s -- the
consensus
>of business opinion insisted that shorter hours would strangle output and
>spell economic ruin.
>
>Ironically, the assumption that output varies in direct proportion to the
>number of hours worked is a restatement of the old lump-of-labour fallacy.
>Those opponents of shorter work time who complacently -- and mistakenly --
>invoke the lump-of-labour fallacy are the one's who are actually guilty of
>committing it!
>
>How long should the work week be?
>
>The optimal length of the standard work week has changed historically along
>with changes in the intensity of work -- and it will continue to change.
The
>optimal length at any particular time can only be determined by
>experimentation. And the research is not simple -- the relationship between
>the hours of work and the intensity of effort is not mechanical. Past
>research on optimal work times has invariably found a lag between a change
>in schedule and an increase in productivity as people work out new ways of
>doing things and as they gradually recover from accumulated fatigue. There
>also needs to be ongoing research into the relative benefits of other
>arrangements, such as longer vacation times or phased retirement, compared
>with shorter work weeks.
>
>A common sense rule of thumb should be, however, that when unemployment is
>high, the hours of work are too long. Nothing could be simpler. High levels
>of unemployment enable poorly-managed companies to obtain labour at a
>discount and to pass on their excess costs to the public. High unemployment
>can never be "good for the economy".
>Unemployment isn't "natural"
>
>A policy to fight unemployment by reducing the hours of work goes against
>the received economic orthodoxy of the past quarter century. That orthodoxy
>-- following Milton Friedman's theory of a "natural" or non-accelerating
>inflation rate of unemployment (NAIRU) -- has held that a certain amount of
>unemployment is "necessary" to prevent spiraling inflation. The orthodox
>policy keeps interest rates and unemployment high in order to fight
>inflation. High interest rates and the social costs of unemployment
>contribute to government deficits, which in turn are used to justify the
>slashing of social programs.
>
>James K. Galbraith, in his book Created Unequal: The Crisis in American
Pay,
>has shown the NAIRU theory to be both theoretically incoherent and
>completely unsupported by the historical evidence. Those of us on the
ground
>in the economy already know well enough from experience the consequences of
>the conservative nostrums of high interest rates, chronic unemployment,
>soaring inequality, dismantled social programs and betrayed promises of a
>larger "pie-in-the-sky" of prosperity.
>
>Right-wing economic policy fails because it insists on rewarding investors
>without regard to how efficiently that investment employs labour. It waves
>the flag of "competitiveness" while ensuring, through the maintenance of
>high unemployment, that poorly-managed firms are exempt from competing in
>the crucial area of how efficiently they employ labour resources.
Right-wing
>policy proclaims it's opposition, "in principle", to a free lunch while at
>the same time serving up a bottomless banquet of low-cost labour to "dumb
>money".
>
>A Prosperity Covenant
>
>Reducing the hours of work is not an economic panacea. The efficiency gains
>from shorter hours -- and the long term employment gains -- don't come
>automatically from the reduction in hours. They come from adjusting to the
>reduction in hours. The process of adjustment requires co-operation between
>labour and management. That adjustment could be undermined by labour
>insisting on windfall gains from shorter hours or by managers passively
>allowing their gloomy expectations to become self-fulfilling prophecies.
>
>The adjustment undoubtedly requires other government policies that
>complement a reduction in work time -- such as changes in the structure of
>payroll taxes, responsive fiscal and monetary policies, support for
>appropriate infrastructure development, etc. It is also unlikely that a
>single configuration of work time would be appropriate for all occupations
>and all industries. Perhaps an annual cap on work hours or a flexible band
>of hours would make more sense than a fixed daily and weekly limit. Like
any
>other technology, the success of a policy for reducing the hours of work
>depends crucially on the design of the policy.
>
>Although a reduction in work time would not be a panacea, it would be a
>powerful antidote to the toxic, high-unemployment orthodoxy that has been
>poisoning the Canadian economy for two decades. The recent federal budget
>speaks of the need for a "productivity framework". But there can be no
>sustained increase in productivity without an assurance that all will share
>fairly in the resulting prosperity -- a prosperity covenant. Reducing the
>hours of work lays the indispensable foundation for such a prosperity
covenant.
>
>regards,
>
>Tom Walker
>
>
>
