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How Shorter Working Hours and International Trade are Related

by Bill McGaughey

The goal is to create and maintain an economy with people fully employed in productive and useful activities and, in return for their labor, receiving an adequate wage. This ought to be the cornerstone of national economic policy.

The reality is that Americans are working much longer hours than they should, many workers are unemployed or underemployed, and real wages have been flat for a long time. National policy makers need to change course to pull out of this failing situation.

The substitution of capital equipment - machines - for human labor is a factor underlying unemployment. Consider the following example:

Let’s suppose that a supermarket has ten check-out counters each staffed with a clerk. The customers bring grocery items to the counter, the sales clerk reads the price affixed to the item, and enters it into an electronic date base connected with the cash register. The supermarket thus employs ten persons engaged full time in this process.

Now let us suppose that the supermarket owner purchases a bar-code system that allows the clerk to pass the bar coding beneath a scanner in order to read the price. In a single swoop, the price is both read and entered into the system, saving two previous steps. The sales clerks are thereby able to ring up the groceries more quickly than before. Let’s suppose that the supermarket can eliminate two of the ten counters without affecting the flow of customers.

No longer needing the two sales clerks at these counters, the supermarket company lays these employees off. The former employees become unemployed. Eventually they find jobs in another sector of the economy. One calls this “displacement of labor”. The two employees have been displaced from jobs at the supermarket. The supermarket owner has made an economic decision to spend a certain amount of money immediately for the bar-code scanning system in order to save the wages and benefits of the two eliminated employees. This industry has become more efficient. Labor productivity has increased.

The result of labor displacement is that unemployment increases or else employment increases in other industries. Over the long term, employment increases in industries whose product is not as useful as groceries. Examples are the military, the corrections system, gambling, etc. We have more of this wasteful type of activity in our economy and proportionately less of useful production. Also, overt or hidden unemployment tends to increase long term. There is a surplus of labor associated with an economically unwanted population.

But let’s get back to the example of the two sales clerks losing their jobs because bar-code scanners were installed at the check-out counters. Let’s suppose that, somehow, society or the grocery industry decides to adopt a four-day, thirty-two hour workweek. The supermarket continues to be open fourteen hours a day - from 8 a.m. to 10 p.m. - seven days a week, but its employees are now working only four eight-hour days. Management schedules them to staff the store continuously as before.

If the supermarket has eight check-out counters open during the day to handle the flow of customers, it will need to hire the two discharged employees back in order to process the same volume of grocery purchases. We are assuming that each employee works at the same speed as before. However, instead of restoring the two eliminated counters and hiring people to staff them, the store manager uses the hired-back employees to cover the work lost when employees went from a five-day to a four-day workweek. Let’s suppose that work on Friday was eliminated for the employee. If the store remains open on that day, someone will need to staff the check-out counters. It’s the laid-off people who were hired back.

This is the math: After the supermarket installed the bar-code equipment, it had eight employees working eight hours on each of five days in a week. Eight (employees) times eight (hours) times five (days), or 320 man-hours of labor per week, were expended on that function. After the four-day workweek is adopted, we have ten (employees) times eight (hours) times four (days), which again equals 320 man-hours per week. The hiring back of the two discharged employees exactly offsets the loss of labor in eliminating a day of work during the week. We have the benefit to the employer of increased efficiency from the bar-code equipment and the benefit to the employee in having to work only four days a week.

I call this industrial progress, and we had it in the 19th Century. In the second half of that century, while America was rapidly industrializing, labor unions were agitating for a shorter work day. Prior to the Civil War, the ten-hour day was the goal. As this century ended, workers were seeking an eight-hour day. Then, in the 20th Century, there was a move from a six-day week to a five-day week, supported by the unions and business leaders such as Henry Ford. The five-day, forty-hour workweek was made the standard workweek in the Fair Labor Standards Act of 1938.

The U.S. workweek has basically remained at the same level since 1938. In fact, it has tended to increase. The AFL-CIO has ceased to agitate for shorter hours while government and the business community have been opposed to proposals for reduced work time. And yet, labor productivity has continued to increase as before. The result is that the productive economy has been thrown out of balance. Labor has been displaced from productive industries such as agriculture, manufacturing, and mining. The discharged employees have been picked up by unproductive industries such as government, health care, education, and the military. We have growth of GDP without a proportionate increase in useful output.

Let’s assume that we want to get back to a healthier economic model which features more people doing needed and useful work. If a shorter workweek were introduced, one would assume that labor would flow back into industries that produce goods or services which people actually want. At least, there would be no reason to employ people in unproductive industries just to keep them employed. We would thus have higher employment in functions that produce useful products with increased leisure for working people. Nothing of value would be lost.

How to get a shorter workweek? One way would be for organized labor to make reduced hours an objective in its bargaining sessions with employers. The proposed contract might call for reduced work hours with no reduction in pay as an alternative to having the same hours with increased pay or benefits. As a practical matter, the unions are not going to seek this change.

The other way is for government to legislate shorter hours. In the United States this might be done by amending the Fair Labor Standards Act. Currently, that law makes the forty-hour week the “standard” workweek and requires that employers pay a premium wage to covered workers who are required to work more hours in a week than the standard. In other words, employers are not required to adhere to the standard workweek but they incur a financial penalty in failing to do so.

The federal government could pressure employers to adopt four-day, thirty-two-hour workweeks by amending the Fair Labor Standards Act in several ways:

1. It might reduce the standard workweek from forty hours to thirty-two hours so that employers would have to pay a premium wage at a lower number of weekly hours.

2. It might increase the rate of overtime pay from time-and-a-half to double-time so that scheduling work beyond the standard become financially even less attractive.

3. It might increase the coverage of the Fair Labor Standards Act to include some workers who are currently “exempt” because they work in administrative or professional positions.

4. It might require that the overtime pay be paid to the government rather than to the employee so as to eliminate the incentive for employees to work longer hours.

Any of these measures, alone or in combination, would effectively push employers to schedule shorter work hours. The employer would try to avoid the higher costs associated with overtime work by hiring people to fill the gap in production. That should take care of unemployment and the unhealthy move toward wasteful activities. However, several important questions remain.

First, there is the problem of health-care costs. If an employer who hires new workers picks up skyrocketing costs for health insurance mandated by the government, then that employer might decide that the increased costs associated with overtime pay are preferable to hiring new people. The solution is to decouple health insurance from employment or somehow control the rise in health-care costs. It’s a big problem.

Second, employees who work longer hours will be concerned about a possible loss in pay. Employers will be concerned the increased labor costs from hiring new workers and the possible loss of profits. Yes, both are valid concerns in the short term but eventually they will be corrected. Studies show that industries featuring shorter work hours tend to pay higher wages than in industries having longer hours. Employer profits can also be maintained in an economy providing greater leisure. Here’s why:

With respect to workers’ wages, shorter average hours combined with steady employment reduces the supply of labor. By the law of supply and demand, reduced supply with unreduced demand drives up the price of a commodity. In this case, labor is the commodity. The price of labor naturally rises as its supply shrinks. It’s not necessary for government to regulate with respect to the level of wages.

With respect to employer profits, the increased labor costs mean increased wages for working people. This translates into increased consumer demand. Increased demand brings more production to meet the demand, a higher volume of sales, and increased profits. Also, increased leisure stimulates consumer demand as people in their free time find new uses for products of various kinds. Employers, as the sellers of products, benefit from selling to a stronger market.

The problem with management today is that it takes a short-term perspective because management pay is based on quarterly profits. The benefit of shorter work hours are mainly in the long term. If a business manager took a long-term view of his business, he would see the beneficial effects of shorter work hours and be more inclined to support them.

One business manager who did take a long term view of things, because he owned the business, was the automobile manufacturer Henry Ford. He said in 1926:

"The country is ready for the 5-day week. It is bound to come through all industry... The short week is bound to come, because without it the country will not be able to absorb its production and stay prosperous. The harder we crowd business for time the more efficient it becomes. The more well-paid leisure workmen get the greater become their wants. These wants soon become needs. Well-managed business pays high wages and sells at low prices. Its workmen have the leisure to enjoy life and the wherewithal with which to finance that enjoyment.

“The people with a 5-day week will consume more goods than the people with a 6-day week. People who have more leisure must have more clothes. They must have a greater variety of food. They must have more transportation facilities. They naturally must have more service of various kinds. This increased consumption will require greater production than we now have. Instead of business being slowed up because the people are 'off work', it will be speeded up, because the people consume more in their leisure than in their working time. This will lead to more work. And this to more profits. And this to more wages. The result of more leisure will be the exact opposite of what most people might suppose it to be.”

The U.S. consumer market was created from this philosophy. Lately, however, that market has become weaker. America does not have the industrial base that it once had. It has longer, rather than shorter, work hours. It has stagnant wages and rapidly increasing health-care costs. It has expensive education and unemployed graduates needing to pay off their student loans. It has increased taxes combined with unprecedented borrowing and debt. Practically everything we do economically turns to ashes even as academic dogmatists insist we must continue along the same course.

Trade policy enters the picture

Let's start with the loss of America’s manufacturing base. In a global economy, producers of goods and services are looking to produce those products at the lowest possible cost anywhere in the world. Labor and other costs are significantly lower in nations such as China and India whose economies industrialized after the United States. With policies of free trade, employers are able to shift production to those countries and bring the products back into the United States for sale here. Wealth is therefore escaping from the United States to the producing countries. Our nation has incurred an enormous cumulative deficit in our trade accounts. Foreigners own an increasing share of our debt.

The shorter workweek argument won’t work in that environment. Yes, the U.S. government can enact shorter-workweek legislation, but multinational employers would take it as a sign of a poor business climate in the United States. That stigma would accelerate the trend of outsourcing production elsewhere. In the hands of such employers, the dire warnings that a shorter workweek would wreck our economy could become a self-fulfilling prophecy.

Therefore, our current policy of free trade needs to be scrapped. The U.S. government cannot and should not prevent employers from building production facilities in other countries. Its legitimate interest is in making sure that the U.S. economy remains in balance. The economy is not in balance when goods are produced in one country (China) and sold in another (the United States). Balance can be restored by imposing tariffs on imported goods. Then, goods which are produced in another country will have to be sold in that country if the business firm is to make a profit. If it tries to bring them into the United States, it will have to pay a tariff that will make its imported goods less competitive with respect to goods produced here.

When I said that shorter work hours need not bring lower wages, I was assuming a closed economic system. Supply and demand works within such a system. If shorter work hours shrink the supply of labor so that wages increase, we would not want the labor supply then to be increased by an influx of foreign labor. Obviously wages would decline in such a situation. Boundaries need to be maintained in the labor market so that the law of supply and demand can work.

Again, when I said that employers might benefit from increased consumer demand if shorter work time were enacted, I was assuming that the increased employment would bring increased wages and stronger consumer demand. That would not occur if employers instead shifted production to a low-wage country. Then whatever stimulus might be brought to the consumer market would occur in that foreign country. American workers, no longer employed, would be unable to generate increased consumer demand. Ultimately, sales and profits of firms selling to the U.S. market would be diminished.

Therefore, to deal with this nation’s employment problems, we need changes both in our structure of working hours and in our system of international trade. We need shorter hours without production escaping abroad. How is that possible? It is possible if all industrial nations simultaneously reduce their level of working hours. That is the next frontier in international trade - not free trade but trade used as a regulatory tool by national governments to promote shorter work time and increased employment in all industrialized countries. Let the hard-driving employers find a “poor business climate” everywhere.

Would China, for instance, go for this approach if the United States wanted it? I think so. First, the Chinese government has had a recent positive experience when in May 1995 it eliminated the half-day work on Saturdays and went to a forty-hour week. There has been some discussion in China of reducing the workweek further. Second, unemployment is as great a problem in China as it is in the United States. For domestic reasons, it might want to keep its huge work force employed by working people for shorter periods of time. Third, if China has a “communist” government, its leaders might be sympathetic to the ideas of Karl Marx who warned how capitalism would destroy itself by destroying its consumer market. Theoretically, the Chinese government should sympathize with the working class. Pure capitalism isn’t working so well.

Therefore, I think we Americans could approach other nations in a spirit of mutual interest asking how our global employment problem might be solved. It obviously will not be solved by financially driven growth that wrecks the environment. It will be solved instead by giving the mass of people greater leisure and the opportunity to fulfill themselves in non-material ways. Such an awakening of the human spirit can take place around the world.

The place to start is by changing the hearts and minds of our own representatives in Congress and in the White House. Unless our elected representatives can tear themselves loose from the insistent demands of Wall Street, no such progress can be made. Either government sides with the big contributors to political campaigns or it sides with the people.

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