Friday, August 14, 2009

Can firms simply add hours to recover output? No.

The RGE Monitor recently uploaded one of my articles on productivity. I believe that the corresponding comment deserves a public response; it refers to the tradeoff faced by employers between laying off workers or reducing hours worked (chart to left, where July hours worked remains at a historical low of 33.1 hours per job). Here’s the comment on the RGE (here):
Rather a slim thread. Many positions are now simply GONE. And where on earth is the basis for the assumption that corporations will quickly rehire, especially in the US? The work week can simply be brought back to 40+ hours from 33 and that by simple arithmetic is over a 20% increase in labor hours. That is a lot of economic expansion, ALOT!!! Where is this great consumer engine in the US?? I am not acquainted with many who believe ANY of these cheery fairy-tales. Corporate America has announced that outsourcing will continue with a vengeance.
His point, firms can simply increase hours and A LOT of growth will result, is only a partial point at best. Now, as readers will notice on the chart above, the average workweek has never been 40 hours – that is a myth. In fact, the average over the five years previous to the recession, 2002-2007, was just 33.78 hours/job.

Let’s do this arithmetically – will GDP grow A LOT if hours reverts to the previous 5-yr mean of 33.78 (a 2.05% increase from 33.1)?
  • Assume a simple production function in each period; Y1=A1*(L1^(2/3)) and Y2=A2*(L2^(2/3)) (cannot do better in blogger with no equation editor).
  • Assume that productivity stays the same: A1 = A2 = 1.
  • L1 and L2 are total hours worked = average weekly hours * employment (I use the private nonfarm payroll)
How much growth does the economy get? According to our assumptions:
  • Y1 = 23512.62
  • Y2 = 23833.16
dY/Y (percentage change in income from period 1 to period 2) = 1.36%. And in an alternate scenario, where average hours worked reverts back to its 10-yr average of 34.0 hours/job, the output gained is just 1.86%.

So, by increasing hours per job back to 33.78 hours/job gets the economy an added 1.36% of growth. GDP output has dropped 3.9% since its peak in Q2 2008; and in order to recover all of that lost output, GDP will have to grow 4.1% from where it is right now. Call me crazy, but simply replacing hours is not going to get us very far.

Rebecca Wilder

2 comments:

  1. Rebecca,

    I understand your need to respond.

    You are quite correct that increasing hours will not contribute to a significant recovery in GDP. What will be needed is subtsantial re-employment.

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  2. Of course there is a recovery. With the amount of deficit spending pouring into the global economy it would be a great surprise if we did not have some kind of resurgence. The worries are: first, that the recovery is so weak; and second that governments and central banks simply cannot go on spending like this without dire consequences.

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