Tuesday, October 20, 2009

Is It a Lower Hours, Higher Output World?

From the WSJ:

Companies across the economy are holding off on hiring even as the profit outlook improves, amid economic uncertainty and their own success at raising productivity in rough waters.

Hiring always lags behind in economic recoveries, but the outlook this time is worse, many economists say. Most forecasters now expect a prolonged period of high unemployment, even though the government is expected to report next week that the economy grew in the third quarter, after four quarters of contraction. That is sure to frustrate the jobless and could be a problem for the Obama administration.

There are several major factors behind the trend, which is coming on top of sharper-than-expected job cuts in the recession. Many businesses have nagging doubts about the durability of the upturn, attributing much of the recent growth in orders to a move by their customers to rebuild inventories and to government stimulus spending, rather than underlying strength in their markets.

Businesses also face uncertainty about the potential costs of regulatory moves -- such as an expansion of health care and climate legislation -- that could drive up costs. And many employers have learned how to produce more with a smaller number of people than they previously thought possible.

In light of the above story, consider this chart of total hours worked:

Click for a larger image

This is a chart of average weekly hours. We can break it down into four different areas.

1.) Notice the continual decline in hours worked from 1965 to 1990. I do not know what to attribute this to. However, the fact remains that the average number of hours worked consistently dropped for 25 years.

2.) During the the 1990s expansion we saw average hours worked fluctuate between 34 and 34.5.

3.) During the early 2000s expansion we saw average hours worked drop a bit into the upper 33 hours/week are.

4.) We have seen a further drop which occurred as a result of the poor employment situation during the recession.

Notice that once we see a decrease in average hours worked we have never seen an increase in average hours worked.

As a result, we are seeing strong increases in productivity:

The same story is being repeated across the economy -- in factories, hotels and banks. The average workweek is now down to 33 hours, the lowest since records started in the 1960s. Productivity, or output per hour of work, grew at a 6.6% annual rate in the second quarter, as employers shed workers faster than they cut output. It was the largest increase in any quarter since 2003. Productivity grew at a 2.5% pace from 2000 through 2008.

"Businesses have been so aggressive in cutting labor input that productivity rose noticeably in the first half of the year," Federal Reserve staff economists told officials at their September meeting, according to minutes released last week.

UPDATE: One of our regular commenters added this point

This would be the perfect time to go to a 32-hour workweek, with time-and-a-half until 35 hours, and double-time after that.

Spread the jobs around to as many workers as possible.

I'm not sure I agree with the idea specifically. However, the basic point -- that with a continual drop in hours worked we need to alter the overtime definition/thresh hold etc... -- is a very valid point and one that needs to be considered.