By Dean Baker
Nobel Laureate Paul Krugman and Richard Layard, a distinguished British economist, took the lead last week in drafting a sign on “Manifesto for Economic Common Sense” condemning the turn toward austerity in many countries. This manifesto seems destined to garner tens or even hundreds of thousands of signatures, including mine.
While the basic logic of the manifesto is solid, there is an important aspect to the argument that is overlooked. We can deal with unemployment every bit as effectively by having people work fewer hours as by increasing demand.
The most important point to realize is that the problem facing wealthy countries at the moment is not that we are poor, as the stern proponents of austerity insist. The problem is that we are wealthy. We have tens of millions of people unemployed precisely because we can meet current demand without needing their labor.
This was the incredible absurdity of the misery that we and other countries endured in the Great Depression and that Keynes sought to explain in The General Theory. The world did not suddenly turn poor in 1929 following the collapse of the stock market. Our workers had the ability to produce just as many goods and services the day after the collapse as the day before, the problem was that after the crash there was a lack of demand for these goods and services.
The result of this lack of demand was a decade of double-digit unemployment in the United States. The spending programs of the New Deal helped to alleviate the impact of the downturn, but because of the deficit hawks of that era, Roosevelt never could spend enough to bring the economy back to full employment, or at least not until World War II made deficits irrelevant.
This is the same story we face today. The U.S. and European economies were close to full employment in 2007 due to demand created by housing bubbles in the United States and across much of Europe. These bubbles then burst, substantially reducing demand. As Krugman and Layard point out in their statement, one remedy for this loss of demand is for government to fill the gap. If the private sector is not prepared to spend enough to bring the economy to full employment, then the government can engage in deficit spending to make up the shortfall.
But there is another dimension to this issue. It’s great for the government to generate demand insofar as it can productively employ people. This means either providing immediate services, like health care and education, or in investing in areas that will provide future dividends like modernizing the infrastructure or retrofitting buildings to increase their energy efficiency.
However it can also employ people by encouraging employers to divide work among more workers. There is nothing natural about the length of the average work week or work year and there are in fact large variations across countries. The average worker in Germany and the Netherlands puts in 20 percent fewer hours in a year than the average worker in the United States. This means that if the U.S. adopted Germany’s work patterns tomorrow, it would immediately eliminate unemployment.
Of course it is unrealistic to imagine such large changes occurring overnight, but governments certainly can attempt to encourage employers to shorten workweeks and increase vacation and other paid time off. In fact, this is the real secret of Germany’s post-crisis recovery. Germany’s growth has been no better than growth in the United States since the start of the downturn, yet its unemployment rate has fallen by 2.0 percentage points while unemployment in the United States has risen by almost 4.0 percentage points. The difference is that Germany encourages firms to reduce work hours rather than lay off workers.
Since workers in the United States put in the most hours, it has the greatest potential gains in the United States from shortening work years, but all countries can try to go this path. In the short-term this route keeps people employed and allows them more time to enjoy with their family and friends. Ideally most of the lost wages will be made up with subsidies from the government. (Remember, the problem is too little demand, not too much. We can afford this.)
In the longer term, workers may find that they prefer more leisure and may be willing to sacrifice some income to have a shorter work week, paid vacation or family leave or other paid time off. If that ended up being the case, it would be a lasting benefit from using short-time work as a route for dealing with the downturn.
However even if there are no long-run changes in work patterns, shorter work hours should be on everyone’s list as a mechanism to combat unemployment. It is a proven success story with real benefits for workers and the economy.