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(A Shorter Workweek in the 1980s)
WHICH FALLACY IS FALLACIOUS?
I have been told by experts as well as unknowledgeable persons that the shorter-workweek idea is a fallacy. Furthermore, it is simplistic. It is like featherbedding and is another form of welfare. Decent, hard-working citizens don’t ask for shorter workweeks; they roll up their sleeves and get to work. Shorter workweeks are not what built this great country of ours. No respectable economist would endorse such a scheme. The overwhelming political, moral, religious, and economic consensus in America at the present time is against the shorter-workweek idea; and it is, as often is the case with any overwhelming consensus, dead wrong.
If the shorter-workweek proposal is so simplistic and is such a fallacy, then professional economists should have little problem refuting it. I have been trying for a number of years to determine the nature of their objections. Occasionally, I have had the opportunity to question the critics in person. One such economist - a giant in his field - I engaged in discussion after a public meeting and put to him the question. He replied that a shorter workweek might be beneficial from the standpoint of increasing the variety of work-time patterns but, of course, it had no relevance to the unemployment question. When pressed to justify that opinion, he backed off saying that labor economics was not his specialty. Nevertheless, he felt that unemployment had to be dealt with through some other means such as job retraining or repealing the minimum wage. He was also of the opinion that a shorter workweek imposed arbitrarily might lead to more moonlighting.
Another economist - a man with an international reputation - I approached through correspondence. Though he was kind to answer my letter, he made it clear what he thought of the shorter-workweek idea. He wrote: “ I cannot possibly answer your letter in full. But let me only record my frank opinion that it is based on a fallacy ... The type of proposal you make is one that always comes up whenever there are temporary periods of unemployment. It was a very popular proposal in the 1930s during the Great Depression. It was then argued that there was simply not enough work to go around, and the thing to do was to share the work by reducing the work week. If you compare the total output of this country now to what it was in the 1930s, it is clear that was wrong then. I believe it is wrong now. Such a solution is a make work solution rather than a solution which opens up wider opportunities for everybody.”
On the front page of the Wall Street Journal on February 28, 1977, there appeared a column by Lindley H. Clark Jr., hitting the shorter-workweek argument like a blast of buckshot: “Share the work. The cry is almost as old as the labor movement itself. Every time business activity slows down or unemployment is unusually high, labor unions revive the notion that there’s only so much work to do and that it should somehow be redistributed among all those seeking jobs. Economists, in their unkind way, sometimes refer to this as the lump-of-labor fallacy. Whatever it’s called, it’s rearing its head once again ...
“One objection to this approach is that it would do nothing to raise total output, the ultimate source of more jobs and more income. In fact, sweeping changes in the long-established work schedules and practices probably would make industry less efficient. At the same time less work for the same pay would mean higher costs and strong upward pressure on prices. Employes who were working less might find that they also could buy less with their unchanged pay checks; their ‘real’ income might decline. Some would use their new free time to moonlight, taking on part-time second jobs. The net result of a four-day, thirty-two hour week by itself, could easily be fewer new jobs for the unemployed and lower real income for the employed. Such a result is hardly desirable.”
The main theme of the above arguments is perhaps, the idea of the “lump-of-labor” fallacy”, with particular reference to the Great Depression. Shorter-workweek advocates assume that the amount of work which needs to be done in the economy is fixed and the only way to increase employment is by giving each available worker a share of the paid work time. However, America licked the Depression not through work-sharing but by increasing the volume of economic activity so that more workers became employed, working the same number of hours and receiving the same or more pay.
In the early 1960s, when people feared that “automation” might destroy jobs, John Diebold countered with the following argument in testimony before Congress: “Unlimited demand for goods and services will prevent unemployment from automation. Since human wants are unlimited, increased productivity and production will find a market in satisfying these wants. Through greater productivity, earnings will increase to such an extent that there will be a tremendous rise in our standard of living.”
There may still be a few who think Diebold was a wise and far-seeing prophet. We “soared” through the ‘60s and the ‘70s were “heavenly”. The contrary point of view is presented in Chapter 2. Many do, however, continue to accept Diebold’s concept of the need for, if not the reality of, an ever-expanding economy to create jobs.
CYCLICAL OR LONG-TERM UNEMPLOYMENT
A commonplace misconception is that unemployment is exclusively a cyclical phenomenon. It is a temporary, if sometimes protracted, interlude between periods of prosperity. It should be said here that we are not advocating a shorter workweek to combat cyclical unemployment. Government monetary and fiscal policies are tailored to that particular problem and ought to be used in the appropriate conditions. A shorter workweek is needed, rather, to relieve labor displacement brought on by advancing productivity over a period of years. The U.S. economy needs now to catch up for the doubling of productivity since the early 1950s while the hours of work have stayed the same. Our failure to reduce hours during this time has produced chronically high unemployment and “stagflation” which cannot be cured by other techniques.
Still, the theory of job destruction through labor displacement is not accepted by everyone. One of the best arguments that I have found against the proposition that advancing technology destroys jobs was made by Professor Paul Douglas in his book, The Problem of Unemployment. Let us follow his train of thought.
Professor Douglas begins the discussion by asking whether a doubling of productivity would cause one half of the work force to become unemployed? His answer is “no” and he uses the hypothetical example of a printing manufacturer to illustrate the point. Douglas reasons as follows: Suppose that a printer manages to double his productive efficiency in printing magazines. He can achieve the same output with half the number of workers. Because of the reduced labor costs, however, this printer will also be able to cut prices. The price cut will stimulate increased demand for his product which, in turn, will require that some of the laid-off workers be rehired. If cutting the price in half doubles sales and production, then all of them will be rehired. If sales more than double, then the printer will have to hire back all of his former employees plus a few more. The extent of the rehiring depends upon the price elasticity of demand for the printer’s product.
What happens if the price elasticity is less than one - that is, if sales increase by a smaller percentage than the reduction in price? Would there be a net reduction in employment and an increase in unemployment? Douglas believes not. He writes: “formerly when the price of the magazine was ten cents and when 600,000 copies were sold, the total weekly receipts were $60,000 or $60.00 for every worker employed. Now when the price is five cents and 900,000 copies are being sold, the total receipts are but $45,000. The readers have 300,000 more copies of the magazine in their coat pockets but they also have 15,000 more dollars which were formerly spent on reading matter. They will do one of two things with this $15,000: - namely, they will either spend it or save it.”
After pointing out that it makes no difference ultimately what their decision is about saving or spending, Douglas analyzes the impact of the dollars spent: “The expenditures of these added sums increases the demand for the products upon which they are spent. It becomes necessary for these industries to take on more men, and they go out into the labor market to obtain them. At the same time, therefore, that men are being squeezed out of the publishing business, purchasing power formerly expended upon the products of this industry is transferred to other industries and builds up added opportunities for work there.
“Nor is this all; the purchasing power transferred bears, in the example given above, the same relation to the number of workers laid off as the total expenditures on magazines bore to the original working force. The number of workers laid off is 250 and the purchasing power transferred is $15,000 a week. This weekly average of $60 per worker is the same as that which originally prevailed in the industry when the ratio was one of $60,000 and 1,000 men. It is indeed the same as that which still exists in the industry between the $45,000 of weekly receipts and the 750 men employed. Not only are new opportunities for employment built up as old opportunities shrink, but they are built up to a degree equal to that by which the older opportunities decay. For every man laid off, a new job has been created somewhere...”
What about this? Does Professor Douglas shut the door on the work-sharing argument? Not quite. Douglas’ thesis contains the seeds of a counterargument. Douglas himself recognized that there were forces weakening the process of job creation which he described. The forces were in his day less highly developed than in ours.
The critical point was his concept of the price elasticity of demand. Fortunately, Douglas gave several examples. In the automobile industry of the 1920s, the price elasticity was greater than one. Douglas wrote: “At the present time, our automobile factories turn out approximately three times as many automobiles with a given number of work hours as they did in 1914. The price of automobiles has gone down although the general price level has risen, and this reduction in the exchange value of an automobile, together with the increased desire of the public for motion, has more than trebled the number of automobiles demanded, so that there were in 1927 approximately three times as many workers employed in the industry as in 1914. Up until 1919 most American manufacturing concerns had indeed similar experiences.”
On the other hand, Douglas agreed that “technological unemployment ... will inevitably result in the case of those commodities where the demand for the product is relatively inelastic.” He observed: “It has been this very inelasticity of demand which has caused the progressive decline in this country in the relative proportion of the population which is employed in agriculture. As the productive efficiency of workers on the farms has increased, the values per unit have on the whole tended to decline to such a degree that the returns which farmers could obtain were less than those enjoyed by corresponding workers in the urban industries. This has led to a migration from the farms to the cities with a consequent diminution in the relative proportion of the gainfully employed who are engaged in agriculture.”
Up until 1919, he noted, most U.S. manufacturing establishments enjoyed the same favorable price elasticity which the automobile industry continued to enjoy through the 1920s. “An increase in production lowered both costs and prices but an increase in demand more than made up for the increase in average output so that the relative number of persons employed in manufacturing increased with each decade. Because of this fundamental fact, nearly every American manufacturer maintained what Henry Ford now maintains, namely, that improvements in production do not cause unemployment ...” Since 1919, however, the experience of manufacturers has been closer to that of the farmers: “Something of the same nature seems within the last decade to have overtaken the production of more standardized manufactured goods. The increase in the output per worker has not been accompanied by a corresponding increase in the quantity demanded with the result that the displacement of labor has been appreciable.”
It is interesting that Paul Douglas felt that manufacturing industries in the United States had passed their prime in terms of dynamic growth by the beginning of the 1920s. Manufacturing is the backbone of an industrial economy. The same tendencies which Douglas observed a half century ago have progressed toward a more advanced stage of entropy. There are always new industries - computers, CB radios, solar heating devices, etc. - yet somehow the steam has gone out of manufacturing innovation. We seem to be running out of ideas for useful consumer products. Almost desperately we are watching for the areas of new growth. Such is the frenzied competition, whenever a new type of product appears, that the market quickly becomes overcrowded with producers, profit margins plunge, and a shakedown ensues. Perhaps it was always this way; but lately the situation seems to have gotten worse. On the other hand, there has been an employment boom, as we have noted, in the service industries and in government.
Certain industries apparently have become saturated at different points in time. Agriculture reached this stage by the end of the 19th century. Manufacturing, according to Douglas hit its phase of slower growth by the end of World War I. Mining has suffered an erosion of jobs since the 1920s. In the next ring of crumbling industries may likely be the other two goods-producing industries, transportation and public utilities and contract construction. Then the process would beset the services-providing industries led by wholesale and retail trade. The growth industries in the latter, decadent phase would be concerned with financial investment or speculation, health care and custodial or protective services, and ultimately government bureaucracy. Such industries are beneficiaries of labor displacement from the goods-producing industries.
The question is whether these services are worth the price which we are required to pay in terms of lost free time. The question is also how secure any worker’s job really is when the output of his labor becomes increasingly unnecessary. Who could justify himself or herself in a high-paying job, or in any job for that matter, if the economy underwent a shakedown to essentials?
When labor displacement has run through the entire list of industries, then the job market as a whole begins to sink. The whole structure of employment softens like a piece of overripe fruit. Unemployment rises as does the need for more welfare. Many workers become permanently displaced from a paying job. There is, in fact, a net loss of jobs throughout the economic system - locally, nationally, and internationally. He who cannot adapt intelligently to the changed circumstances will perish including national economies. More of the same or, as it is usually put, “rededication” to existing purposes will lead to disaster.
WILL SHORTER WORK HOURS OFFSET LABOR DISPLACEMENT?
To offset the overall loss of jobs, it is necessary to reduce the general working hours in the advanced industrial nations so that employment can catch up with technological change. Inventing new industries or propping up old ones is not the answer There must be a qualitative shift in the activities to which people devote their time. The economic and material would decline as the cultural and spiritual ascend.
Admittedly, the experts disagree whether or not this is the long-term trend and whether labor displacement can become permanent. The majority view is, perhaps, still that which was expressed by Henry Ford II in 1962 in the Labor-Management Policy Committee report on automation. He wrote: “The factual evidence strongly indicates that, while automation displaces some individuals from the jobs they have held, its overall effect is to increase income and expand job opportunities. History teaches us that, by and large, workers displaced by technological advance have moved rapidly into other employment, ultimately to better paying jobs.”
Common sense tells us, though, that a businessman will not invest in expensive equipment which improves productivity unless he derives a financial return from the investment. Either the equipment serves to upgrade the quality of the product so that a higher price may be charged or more units be sold at the same price or else it enables the businessman to produce the same goods at a lower cost by increasing productive efficiency. A businessman would not want to install a computer system, for instance, if his total costs increased for processing the same information. Therefore, the argument about well-paid computer programmers and systems analysts replacing the low-paid clerks is a myth, at least in the case of a particular firm.
The question is whether this is also true on the macroeconomic level. If all the separate employers are each busily installing labor-saving equipment, will labor in the aggregate be saved or will the surplus be somehow transformed, resulting in higher employment and production? Now we enter into the domain of professional economists and will have to take their word.
On our side of the argument is Professor Wassily Leontief of NYU, winner of the 1973 Nobel prize in economics. Professor Leontief told the World Congress of the International Metal Workers’ Federation: “New machines, new technology introduced because it cuts production costs, can, indeed, reduce the total demand for labor - i.e., the total number of jobs available in all sectors of the economy taken together at any given rate ... There is .. a problem .. of sharing (the available work) directly or indirectly between those who are employed and those who are not. Spreading the work through reducing the number of working hours per week and of working days per year provides an answer to this question.”
This is too abstract and theoretical, the critics might complain. We do not accept our mathematical calculations, your expert witnesses, your glittering generalities about work sharing. Cite some specific examples of jobs which have been created through shorter hours. That was the gist of the committee questioning at the conclusion of Frank Runnels’ testimony in support of the Conyers bill.
Jim Stephens, the minority counsel on the House subcommittee staff, noted that “in looking at the materials that are available on this issue, particularly the products of economists - and I am thinking here in particular of the study released in October 1989 of the National Commission for Manpower Policy - for a variety of reasons, some of the participants in this commission concluded that legislation to reduce the workweek would not create a sufficient number of jobs to justify passage of the act. They say there are so many economic variables involved that an employers may very well cut back, and there will be increased costs and there will be inflation ... The sense that I gather from all this material is that there is a lack of empirical data to show that there is a high correlation between reducing the workweek, increasing the overtime premium, and making more jobs available.”
Runnels turned the question over to Fred Gaboury, staff representative of the All Unions Committee to Shorten the Work Week. Gaboury began by mentioning European experiences which found a combination of increased productivity and higher employment. Stephens brushed these aside saying that “there are significant differences in the employment situation in European countries and Japan.” Limited in his options, Gaboury said: “The unfortunate thing is that the workweek has not been reduced substantially for any number of workers in the United States. So it would be very difficult to measure that.” Stephens then asked him to furnish whatever information there was on shortened hours in American industries, and Gaboury promised to comply.
After the testimony, Gaboury came back to me, sitting in the audience, and asked, “You have some figures on employment, don’t you?” I had to admit that my information was not very good. I had no facts with which to convince those skeptical Congressmen. Facts of any sort were hard to find. I had to admit that this was one of the weaker links in our argument.
WHAT INFORMATION IS AVAILABLE
Even so, Stephens’ question was a necessary and important one and deserves a careful answer. He was insisting quite properly that the argument for the shorter workweek come down from the level of generalities and rough calculation to the level of fact. With such demands, supporters of a shorter workweek have been thrown on the defensive, being asked for evidence which may not exist or which would be hard to detect or obtain. There are several reasons for this:
(1) In the absence of legislation to reduce the general hours of work, shorter hours would have to come at the employer’s initiative or through collective-bargaining agreements. Such employers and / or unions would be the only ones with access to detailed information about their impact upon employment.
Here we must recognize a potential conflict of interest. Employers are not eager to publicize information which might reflect adversely upon them as managers. If their shorter-workweek experiment succeeds in reducing absenteeism or in improving productivity or worker morale, they will tell the whole world about it. On the other hand, if the experiment leads to increased employment, this would indicate that productivity did not increase sufficiently to offset the decline in hours. Each new employee who must be hired represents an increase in labor costs and a drop in profits. Most employers today feel they are in business to earn profits, not to solve society’s unemployment problem. Therefore, such evidence which may exist of their “failure” may never see the light of day.
Also, of course, where the unions are pushing for a shorter workweek, management would naturally be reluctant to release information which would give them ammunition at the bargaining table. Frank Runnels alluded to this problem in his testimony before the House subcommittee. He said: “We estimate - and we do not have the figures to prove that, General Motors will not give us the figures - but we estimate that the PPH days that have been negotiated in UAW have increased employment by approximately 2 to 3 percent.”
(2) Short of legislation, many employers would not consider reducing the workweek unless the change in hours is introduced at a slower rate than the gains in productivity. They may agree to split the productivity dividend more generously for leisure as against higher wages but they will not consent to give workers more time off than what the productivity gains would warrant. This virtually precludes the possibility that new jobs will be created. If hours are reduced at a slower pace than the rate of productivity improvement, it will not create any new jobs but merely slow down the process of job erosion which would otherwise have taken place.
For example the telecommunication workers in Pennsylvania won an agreement with the telephone company to limit overtime and cut back on operators’ workweeks to 37 1/2 hours in order to save jobs. “Did the 6 percent reduction in hours cause a 6 percent rise in operator employment? “No, but it did stem and slow the toboggan-slide of operator job losses. And a job saved by not being fired is the same as a job hired.”
(3) With productivity improvements, the nature of the jobs before and after the change is frequently altered. Often the new jobs are more capital-intensive than the old ones. Therefore, it may not always be possible to compare “apples with apples” in assessing employment levels.
These are three good excuses why we advocates of a shorter workweek have been unable to provide more convincing evidence to support our central argument, that shorter hours would create jobs. I have a feeling that the critics would remain unimpressed. Somewhere in the industrialized world there must be one or two pieces of solid evidence to support the job-creation theory, if indeed it is correct. Just for the record, then, I would offer the following examples, quoting directly from the source:
(1) From U.S News & World Report: “(The) Meisel Photochrome Corporation, in Atlanta ... switched its plant from a standard five-day week to seven days - two shifts of 3 1/2 days each. Employes work 36 hours but get paid for 40 if their attendance is perfect. Even though total labor costs are higher because 28 new employes had to be hired, Meisel vice president Tom W. Melder says: “Our labor costs are actually less per worker. Overtime is practically nil. Sales have increased 25 percent. Job recruiting is painless..”
(2) From Der Spiegel (translated from the German): “Sigurd Luberichs, personnel director of the Willicher Hannen Brewery, has already figured it out: If the general hours of work were reduced from eight to seven hours, his firm ... would immediately need seven new employees.”
(3) From the Wall Street Journal: “Mr. Bluestone of the UAW’s GM department says that when the union won relief time - paid time off each day - in 1964, the industry had to hire some 9,000 extra workers so that work could proceed while men took their breaks. (Auto makers agree that the relief-time provisions did prompt new hiring, but they say they never calculated the amount.)”
(4) From Across the Board: “Work-sharing programs recently have been launched by many Western European nations as a means to combat unemployment ... German officials estimate that last year unemployment was reduced by 170,000 people through work-sharing - a system that has proved to be less costly to the government treasury than conventional recession-related programs.”
(5) From Hours of Work in Industrialised Countries, a book published by the International Labor Office: “In France, the sample inquiry (referred to above) among those firms which reduced hours of work in 1968-69 on the basis of industry level agreements showed that 48 percent of them took on additional workers, 38 percent installed new plant, and 27 percent introduced extended shift work.”
It might be added that the Commission of the European Communities headquartered in Brussels has a standing committee to study employment problems. The option of work sharing has been brought to the committee’s attention in recent years. A study was made of it in preparation for the Tripartite Conference held in November 1978. The committee report stated: “There was a wide consensus at the Standing Employment Committee that work-sharing measures have an important role to play in the reduction of unemployment within an overall policy ... In the course of the discussion, the following possible forms of work sharing were mentioned: the reduction of working hours; the extension of annual holidays; restrictions on overtime working; the lowering of retirement age ... The Committee did not feel it appropriate to make any specific suggestions at this stage between these various measures but agreed on the general aim of reducing the annual number of working hours per man.”
Presumably, the committee’s “wide consensus” was based upon some kind of empirical information establishing a connection between reduced work time and higher (or stabilized) employment. I cannot say for sure, not having access to their records. Also, in August 1979, Japan’s Economic Planning Agency issued a revised 7-year plan that included the goal of reducing unemployment from 2.2% to 1.7% by the end of this period. The Wall Street Journal reported that, among its points, “economic architects said they would encourage Japanese companies to adopt the five-day workweek and shorten working hours, ‘with the goal of bringing Japanese practices close to equivalent to those in the U.S. and Europe.” Again, the background information which went into that decision is not available, at least to those of us who are illiterate in the Japanese language.
All that can be said at this point is that in western Europe and Japan, where the workweek has recently been cut, further cuts appear to be regarded as a practical step toward reducing unemployment and achieving desirable social goals; whereas in the United States, where working hours have been stagnant, proposals for a shorter workweek are believed to be fallacious. American economists are quick to give their opinion of this idea - i.e., to debunk it - but they seem uninterested in developing new information on the subject. Like the concept of a flat earth, the shorter-workweek scheme is something which scientists disproved long ago. If that is the case, one might hope to find somewhere in economic literature the definitive refutation. However, a Nobel Prize winner in economics who opposes the shorter workweek has admitted: “Unfortunately, I do not know of a single book that discusses these issues comprehensively.”
I have been advised more than once, when a research group with which I am associated was applying for a grant to do a survey on people’s attitude towards reduced work time, that we ought to pretend in the application that the survey was on some other subject such as flex-time and try to sneak the shorter-workweek angle in later. No private foundation, corporation, university, or government agency would touch such a proposal having political overtones. It has been an eye-opener for me to make the rounds of these funding organizations whose brochures say they are interested in sponsoring projects which “effectively aid the economically disadvantaged” and give priority to those which seek “innovative or creative solutions”, or even those which were specifically established to investigate the causes of unemployment, and to learn their reaction to our quite modest proposal. Among other things, I have learned that, apparently, studying the effects of shorter hours does not properly belong to the field of economics but to sociology or a new discipline called “leisure studies”.
Such information which economists will divulge these days about the shorter workweek is apt to be shrouded in an econometric model whose equations are nearly as opaque to me as the Japanese language. (Another mystifying technique was once, when I requested detailed information about the calculation of productivity from a federal agency, to send out a computer print-out with no verbal captions of any sort, and no explanatory letter.) Nevertheless, I have read through several of these scholarly productions in an effort to learn why the proposal to combat unemployment by reducing the workweek is thought to be fallacious. It seems to me that the case against work sharing boils down to two or three basic arguments raised again and again. Let me now quote economists who have made each type of argument and then offer my own arguments by way of refutation.
1. TOTAL OUTPUT WOULD DROP WITH A SHORTER WORKWEEK.
Professors Jeffrey M. Perloff and Michael L. Wachter of the University of Pennsylvania presented a paper entitled “Work Sharing, Unemployment, and the Rate of Economic Growth” at the national conference on “Work Time and Employment” in October 1978, which was sponsored by the National Commission for Manpower Policy. Their study was funded by the General Electric Foundation and the National Institutes of Child Health and Human Development.
In their paper the professors wrote: “It is sometimes suggested that sharing available hours would reduce unemployment without lowering workers’ incomes. This argument seems to be based upon the belief that there is a fixed quantity of work available which is not responsive to the wage rate. In this scenario, hours of work are reduced, the work force is expanded to maintain total man-hours unchanged and the hourly wage rate is increased to maintain total income per worker unchanged. The fixed hours argument, however, cannot possibly hold. If employers are forced to pay higher wages, the firms’ labor costs will rise. Employers faced with higher labor costs can reduce output or substitute other factors of production for the now more costly labor. Even in the short run, the demand curve for labor slopes downward.”
Similar views were expressed by two other economists who testified against the Conyers bill in October 1979. Professor John Owen of Wayne State University told the House subcommittee: “If work sharing simply redistributed a fixed total of man-hours of employment, it would be defended by many as a way of sharing job opportunities with those who would otherwise be unemployed. But work sharing policies may in practice do more than simply share a fixed number of opportunities: They may reduce the demand for labor, increase (or decrease) its supply, and influence the level of employment, unemployment, and output in other ways.
Marvin H. Kosters of the American Enterprise Institute testified: “A reduction in the standard workweek together with less overtime induced by a higher overtime premium would not be translated into a corresponding proportionate increase in new jobs even if hourly labor costs were unchanged. There would be a great deal of ‘leakage’, part of which would be translated into lower production and real income in the economy. If the standard workweek became 35 hours, factories, shops, offices, and service establishments would in many instances simply be open for fewer hours, and the total amount of goods and services produced each week would be lower. This would, of course, be accompanied by lower real incomes that are generated by production and which would be available to purchase goods and services.”
In the course of their professional development, such economists no doubt has been exposed to the concepts of Alfred Marshall regarding marginal prices and costs. According to Marshall’s conception, each commodity has a demand curve which indicates what quantities will be demanded at what price. By and large the quantities which are demanded vary inversely with price. For example, when a customer at a supermarket notices that the price of shrimp has risen to $12.00 a pound, she may decide to buy oysters instead. She might have continued to prefer the shrimp at $10.50 a pound. Each customer has a different point of price sensitivity for the commodity. For the market as a whole, economists may plot upon a graph the quantities of the commodity which customers will decide to buy at each level of price. This is its demand curve.
Labor is no different from any other commodity, say these economists. When its price goes up, the quantity which is demanded goes down. Therefore, if workers’ weekly wages are maintained as hours are reduced, the increased labor costs from hiring new workers will reduce the overall demand for labor.
Labor is not like every other commodity, though. In the first place, its purchaser, the employer, will decide not to buy only if he does not need the labor or if there is a ready substitute. Many economists argue that capital expenditures offer a substitute for labor and to a certain extent they are right. With shorter working hours, some employers might invest in additional plant and equipment to offset the rising cost of labor. That would tend to increase labor productivity. The productivity increases, in turn, would tend to displace labor, both stimulating a demand for further reductions in the workweek and facilitating the change financially. At some point, the purchase of capital equipment to achieve further gains in productivity would achieve equilibrium with labor costs. Considering that the prime rate of interest has risen to 20% in recent memory and that the cost of energy has been rising sharply, I would expect that this point might be reached rather soon, if indeed it has not already been passed.
A second point addresses the question whether the purchaser of labor, the employer, might make a rational decision not to buy labor if a shorter workweek increased its price. Certainly, an employer can always decide not to buy labor. He can close down or reduce operations or try to cut corners by forcing his employees to handle more work than they can safely or competently handle. However, if the sales demand for the product is there, it is unlikely that the employer will decide not to hire the labor needed to produce what can be sold at a profit. It is somewhat more likely that he may choose to take the second route, skimping on product quality, employee safety, or customer service. Some businessmen do operate in this manner; they or their successors pay for it later in the form of reduced sales or loss of employees. In short, most businessmen are not deterred by higher labor costs from producing as much of the product as can be profitably sold.
Another question is whether with a shorter workweek the rising cost of labor might drive up prices to the point that the demand for the employer’s product would dwindle. If only one employer in the industry adopted shorter hours, maybe that would happen. However, a shorter workweek which is introduced through legislation should affect all domestic employers in a similar way. Covered by the same law, they would all feel the same cost squeeze and experience a similar need, if any, to raise prices. The competitive disadvantages should wash.
Internationally, of course, employers are covered by different labor laws. American employers argue, therefore, that a shorter workweek would put U.S. goods at a disadvantage in the world market. Several things may be said about that argument. First, there is a growing sense of the international economic community and of the need to treat worldwide problems including the employment problem through cooperation between nations. The International Labor organization has actively set labor standards for more than 60 years. Not inconceivably, the major industrialized nations might coordinate national efforts to reduce the workweek so that none might take advantage of another competitively. Failing that, the national governments do, of course, retain the power to make imported goods artificially expensive through protective tariffs.
The final point is this: If shorter working hours hurt employers in international trade competition, then why have Japanese, west German, French, and Scandinavian producers who have cut their workweeks within the past twenty years managed to capture a steadily larger share of the world market at the expense of U.S. producers whose workweeks have remained the same?
Some economists have argued that, regardless of competitive considerations, the overall demand for consumer goods and services might decline with the higher prices brought on by shorter hours. However, the demand for goods and services depends not only upon the level of price but also upon the purchaser’s level of income. If the total consumer purchasing power kept pace with the general increase in prices, then consumer demand ought not to slacken. A shorter workweek which created new jobs for the unemployed and for the underemployed without reducing the level of weekly wage would surely fortify consumer demand. Lower rates of unemployment would give people renewed confidence to make major purchases. A “full employment” economy would be far more robust than one which carries excess productive slack.
Those economist who talk of lower output are missing the whole point of the shorter workweek: to put unemployed people back to work. Employed, these people would be producing, earning, spending, and consuming, rather than subsisting on the public dole. When the critics speak of “increased labor costs”, they apparently forget that these costs consist of wages paid to people who were previously unemployed. This money is not lost; rather, the wages which workers spend are recycled through the economy to spur output. Not only would the newly employed workers have money to spend but they would also become eligible for credit. A multiplier effect might take place with respect to consumer purchasing power.
The Joint EconomicCommittee of Congress has estimated that between 1970 and 1976 the U.S. economy lost $600 billion in 1972 prices in lost production due to unemployment. This is what is responsible for the “smaller pie” of which economists frequently speak. Too many are afflicted with “tunnel vision”, or an unimaginatively mechanical way of thinking about the economy. We need to begin thinking organically about the economy as Henry Ford did when, introducing the 40-hour week in the mid 1920s, he said: “It is the influence of leisure on consumption which makes the short day and the short week so necessary. The people who consume the bulk of goods are the same people who make them. That is a fact we must never forget - that is the secret of our prosperity.”
Businessmen and economists a half century ago seemed to be a few jumps ahead of today’s group. The President’s Committee on Recent Economic Changes said in its 1929 report: “Closely related to the increased rate of production-consumption of products is the consumption of leisure. It was during the period covered by the survey that the conception of leisure as ‘consumable’ began to be realized upon in business in a practical way and on a broad scale. It began to be recognized, not only that leisure is ‘consumable’ but that people cannot ‘consume’ leisure without consuming goods and services, and that leisure which results from an increased man-hour productivity helps to create new needs and new and broader markets.”
PRODUCTIVITY COULD DECLINE AS UNQUALIFIED PEOPLE BECOME EMPLOYED
Again, Professors Perloff and Wachter lead the attack on full employment. In their paper delivered at the conference on “Work Time and Employment”, they argued: The popular example of work sharing, however, is not feasible. The important barrier to work sharing is the fundamental mismatch between the skills present in the employment and unemployment pools ... There is a marked tendency for employment to be weighted toward the skilled occupations and for unemployment to be concentrated in the unskilled trades. The average unemployed worker has much too low a skill level to fill in the man hours of the average employed workers whose hours have been reduced in order to share the work. For example, while 26.0 percent of the employment pool was professional and managerial, only 10.8 percent of the unemployed were in these categories.”
This is the old argument about structural unemployment which was discussed in Chapter 1. Lest we repeat the discussion, let me state briefly what I believe to be wrong with the professors‘ argument. The main question here is whether unemployed people, given a reasonable amount of time and on-the-job training, could handle the work in those jobs which might become available through work sharing - not whether they have certifiable skills or credentials. America was built by people who were “unqualified” to do what they had to do. Yet, because they lived in a less developed society, they were free to try. Opportunity itself can stimulate better performance. Educational preparation may not be quite as important as the professors would have us believe.
The pity of it is that there are so many talented people wasting away in the various bureaucracies - frustrated, stifled, doing work which does not need to be done and doing it badly. What of their productivity? How could it fail to improve as shorter hours allowed them more often to climb out of their rut? As for the people of more marginal abilities who may or may not be unemployed, all the worrying about their productivity is absurd when the alternative is total inaction. Who can sensibly argue that the economy would not benefit if they became productively employed, however inefficiently? Perhaps the best rebuttal to people like Wachter and Perloff is simply the example of those who, given a chance, did manage to perform beyond their expected capacity.
SHORTER HOURS WOULD NOT REDUCE UNEMPLOYMENT BECAUSE MANY NONPARTICIPANTS WOULD ENTER THE LABOR FORCE AND MOONLIGHTING WOULD INCREASE.
Perloff and Wachter have not neglected to touch base in this area either. In the above-mentioned paper they wrote: “Work sharing has its impact, not by direct creation of new jobs (at reduced hours), but through an indirect effect on market wages ... If minimum wages and transfer payment levels remain unchanged, the increase in the relative market wage will cause an increase in those willing to work. Workers who are currently part of the unemployment pool, as well as those who are out of the labor force, are likely to find the new part-time jobs at the higher wage rates attractive. The result should be an increase in the labor supply and employment. The amount of unemployment may or may not decrease.”
Later, they said: “Perhaps the most important impact of Work Sharing, however, would be an increase in the number of workers who opt for two jobs. To the extent that the Work Sharing did not evolve from a desire for shorter hours among individuals, the likely impact would be a significant increase in moonlighting.”
The moonlighting issue, in particular, is the bugaboo which has been haunting the shorter-workweek cause for the past forty years. Ever since someone discovered that the Akron rubber workers with their 6-day 36-hour workweek held a proportionately greater number of second jobs, the experts have been telling us that a shorter workweek would would only lead to increased moonlighting and so its purpose of creating jobs for the unemployed would be defeated.
A specimen of this opinion appeared in my local newspaper several years ago: ”A shorter workweek, a goal sought by many large unions, will not provide more jobs and will increase moonlighting according to a Chicago management consultant. Dr. Woodruff Imberman of Imberman & Deforest told a seminar at Drexel University Thursday that union campaigns for shorter workweeks are counterproductive. ‘The U.S. Bureau of Labor Statistics found two years ago that a shorter workweek leads mainly to more moonlighting rather than to greater employment,’ Imberman said. ‘In our follow-up study early this year,’ he said, ‘we found among the rubber workers with their 35-hour week, among electricians in New York with their 32-hour week, and among steelworkers in PIttsburgh with their 13-week sabbatical vacations, that these employes do not use their extra time for leisure activities. They seek and find part-time jobs which could be filled by the unemployed.’”
“Moonlighting” appeals not only to our visual imaginations but to the market-segmentation mentality which experts today seem to have. The statistics for various occupational, industrial, sexual, racial, marital, or age groups are readily available and appear to have great social significance. Such information is quick to hit the headlines, interpreted in whichever direction the editors sense a story. For instance, the Wall Street Journal headlined this item in 1977: “Moonlighting waxes as more women take second jobs.” (The moonlighting rate for women then was still significantly below that for men.) The story read: “According to a Labor Department survey, the number of Americans holding two or more jobs surged last year by an unusually large 600,000 to a record 4.6 million, lifting the proportion of employed people who were moonlighters to 5%.”
What such stories do not reveal is that the moonlighting rate in the United States has been hovering around the 5% mark for the past twenty years. Since 1956, when the BLS began reporting these statistics, the rate of multiple jobholding has ranged annually between a high of 5.7% in 1963 and a low of 4.5% in 1959 and again in 1974. The rate in 1978 was 4.8%. There is simply no evidence of a “trend” toward increased moonlighting.
As for the argument that workers on shorter workweeks have a higher moonlighting rate than those on regular workweeks and, therefore, a tidal wave of moonlighting would engulf the economy if the standard workweek were reduced, the logic is faulty. Shorter workweeks today are quite unusual. The social patterns to accommodate them are yet undeveloped. A workers who works noticeably fewer hours than his neighbor may feel a social, personal, or perhaps marital pressure to look for a second job lest he appear unambitious and lazy. On the other hand, if all the breadwinners on the block worked shorter hours, then each would feel satisfied that he had done his economic duty and could do what he really wanted to do with the extra time.
This type of criticism lacks all sense of measurement and proportion. Granted that the moonlighting rate might increase if the workweek became shorter, all this means is that there would be a certain doubling back in the job-creation process. It does not mean by any stretch of the imagination, that unemployed people would not gain any jobs. A 5% moonlighting rate hardly represents a threat to employment. Suppose that this rate doubled - to 10% - and that all the moonlighters took full-time jobs, their additional man-hours would take away only about 20% of the gain in man-hours of paid labor which a 32-hour week might give the unemployed.
The argument about increased moonlighting is a false issue. To refuse to help the unemployed because we are afraid we might not be completely successful is surely no help to them. If the employed workers take second jobs because they need the money or because it allows them to exercise unused talents or pursue real interests, then this is altogether a positive experience and ought to be encouraged Whether the new jobs are taken by unemployed persons or by those not in the labor force who may be equally destitute is likewise a false issue. The real issue is whether the average full-time workweek in the United States could be substantially reduced without reducing the standard of living.
THE LIKELY RESULT
Quibbling aside, what might actually happen if the workweek were cut from 40 hours per week to 35 or 32 hours per week and workers received the same weekly wage? There would be increased pressure on workers to get the job done in the available time and pressure upon labor costs as well. This is, of course, what the critics are suggesting - with some justification. However, the immediate bad effects would have a silver lining. To cope with the additional labor costs, employers might rearrange the work routines to allow work to be done more efficiently. They might invest in additional plant and equipment to offset the rising cost of labor. They might crack down on absenteeism and tardiness or devise new incentives for workers to improve their production. Whatever else such measures might accomplish, they would serve to increase productivity.
Second, the employer might hire more workers. If the level of sales held steady or increased, the employers would want to maintain production at a level to meet the sales demand. If the present crew of workers could not meet it working fewer hours in the week, the employer would have no choice but to hire more people. That, of course, is the whole point of a shorter workweek - to create jobs for the unemployed.
If the workweek were reduced, the most likely result would be a combination of higher productivity and increased employment. One should be aware, however, that these two effects are not mutually confirming, as some pretend, but occur in a trade off. The greater the gains in productivity, the fewer workers will be needed to handle a given piece of work. If employment increases faster than the work, then productivity may decline.
The employer must evaluate his particular needs for cost-effective production. On one hand, higher productivity may be purchased at the cost of investing in equipment, employee training, or operational software. This approach is limited by the availability and cost of money Increased employment, on the other hand, would be purchased at the cost of additional wages and benefits for the new employees. To an extent, however, this cost would be offset by savings in contributions to the Unemployment Insurance fund and other social expenditures if the new hiring results in lower unemployment. If money is scarce, hiring people might look especially attractive.
In the absence of wage-and-price controls, it is nearly impossible to guarantee that wages would be adjusted in a particular way if working hours were cut. Such controls would greatly complicate the procedure and are, besides, quite unnecessary. Free-market forces would look after the interests of both the employer and employee. Ultimately, it would make little difference whether, with a shorter workweek, wages were kept at the same weekly or hourly rate. If the employer pays the same week wage, he might have to pass along the increased labor costs to the consumer in the form of higher prices, which would tend to reduce the purchasing power of the employees’ wages. On the other hand, if the employer pays the same hourly wage and a lower weekly wage, he might eventually have to raise the hourly rate to retain his experienced employees as the level of unemployment dropped Through supply and demand, it would turn into a seller’s market for labor.
The choice, therefore, is not between slicing the economic pie more favorably for the employer or for the employee but between a full-employment economy and what we have now, a “split-level” economy in which some people are overemployed in terms of hours and income while others are underemployed. Ours is an economy split between those who work and pay taxes and those who do not work but are supported by others or by transfers from he government. It is as true today as it was in Lincoln’s time that “a house divided cannot stand.”
Does it make sense, for instance, for one man to work overtime earning one-and-one-half times his normal hourly rate of pay while another man who is unemployed could and would, if given a chance, do the same work for straight-time wages? Where one man is employed for 40 or more hours per week and his unemployed neighbor is drawing unemployment compensation, would not it be a gain to both if the unemployed worker assumed part of the employed one’s work and part of the income? Clearly, from a general standpoint, the time would be better spent - in economic terms, it would have more “marginal utilitity” - if those who were presently employed had an extra day off each week for cultural and recreational activities of their choice instead of the present arrangement in which unemployed people spend their time looking for a job.
Is this analysis faulty? Is the argument unreal? Let’s stick to facts. If our theory is correct, then we ought be be able to find concrete evidence of the predicted effects; and so we shall. Most of us read the newspapers and magazines and watch television, and we have lately encountered numerous stories about the economy. We have been through cycles of recession and recovery many times. The 1973-75 recession hit suddenly, it seemed, but was a long time in mending. Something like this may be happening today. I have clipped some articles from the print media from that period which could indicate where we are headed.
So let’s take a journalistic stroll through the streets and byways of the welfare state and view the scenery. No paradise for the lazy, it is an economist’s showcase - everything stabilized and fine-tuned. Several prominent features are noticed along the way.
IN THE ABSENCE OF A SHORTER WORKWEEK, UNEMPLOYMENT BECOMES CONCENTRATED AMONG THE YOUNG.
Time magazine reported in its May 30, 1977 issue: “Massive youth unemployment - and the threat of social and political unrest that goes with it - now faces the world’s industrialized democracies ... So grave has the problem become that seven major world leaders including President Carter resolved at the London economic summit ‘to exchange experience and ideas’ on youth joblessness, a formal recognition that this issue has got too big for any nation to handle. Millions of jobless young people between 16 and 24 roam the streets of major U.S. Canadian, and Europeans cities looking for work by day and cramming into bars, beer halls, sleazy pubs and pool halls at night ... There is talk of sex, sports and cars, as usual, but the main preoccupation is with the hopeless job market and what governments are doing to stimulate employment. Those attempts range from President Carter’s proposed $1.5 billion expansion of current youth employment to a French scheme that would, among other things, pay young people $970 in cash to leave the country and look for jobs elsewhere.”
Why have the young been singularly visited with unemployment? Some believe it is a matter of simple demographics. The Time article states: “The biggest culprit in the youth employment glut is the high birth rate of the late 1950s and early 1960s in Europe, Canada, and the U.S. This has thrust many young adults into the job market at the very same time when the economies are still only slowly - in some cases, very slowly - recovering from the recent recession.” A second reason that Time suggests is “attitude”. “Most young people want careers, not dull, menial work - ‘McDonald’s jobs’ ... The result: more and more youth will not work at all, preferring to get by on public assistance ... or to take employment only when they run out of cash.” Time’s solution, apparently, is for the young people to wait it out patiently at the back of the line until the economy recovers sufficiently to include them. It declares: “The only way to cut unemployment among youth, says Harvard‘s liberal economist Otto Eckstein, is to ‘get the economy going so we have more jobs.’ When the adults go back to work, the kids will not be far behind.”
IN THE ABSENCE OF A SHORTER WORKWEEK, MANY WORKERS ARE OVERQUALIFIED FOR THE WORK THEY DO; SOME ARE OVERPAID.
An article in the Wall Street Journal traced the career of one such individual: “Graduating with highest honors from the University of Kansas in 1966, Fred Whitehead won a Fulbright scholarship and studied for a year in London. Then he earned a doctorate in English at Columbia University on a Danforth fellowship and landed a college teaching post ... Today, Fred Whitehead, Ph.D., is a welder, helping to build hydraulic cranes at General Supply & Leasing Co. in Kansas City ... Fred Whitehead is one of the underemployed Americans forced by the recession into jobs below their qualifications. While there isn’t an official census of such workers, experts say their number is large and growing. It may include as much as 27% of the nation’s work force according to a recent study by the University of Michigan’s Survey Research Center. And Gerald P. Glyde, a Pennsylvania State University economist, estimates that ‘the total resources lost, in terms of national economic production, may be higher because of underemployment than unemployment.’”
One factor in rising underemployment is the sheer stubbornness of unemployment in an economy that, by other measures, has rebounded sharply. Although recalls of workers have begun in some industries, most employers are keeping payrolls as lean as possible ... Underemployment, however, is also increasing because of forces which predate the recession and promise to outlast it. Chief among them is the educational level of the work force. It has long been climbing at a dramatic rate that is expected to continue. But, sociologists say, there hasn’t been a corresponding increase in the skills most jobs require or the number of jobs that require such well-educated workers. As a result, more and more Americans are overeducated for the work they do. In the past 15 years, for example, the number of male college graduates who had to accept positions unrelated to their majors climbed to 20% from 13%, and the corresponding female total rose to 17% from 10% ... Over the same period, the proportion of college-educated men who had to settle for nonprofessional, nonmanagerial positions increased threefold, and the proportion for women went up fourfold.”
Another Wall Street Journal article tells of three “passed-over employees” who were “suing their firms to demand promotion.” These men were former managers with Ford and Chrysler who were shunted aside in the executive competition yet continued to be paid salaries in the $35,000-to-$45,000 range for shuffling papers. “An increasing number of managers are hiring lawyers to challenge their companies’ personnel policies,“ the article states. “Usually older men, they find themselves caught in a middle-management glut due to the over-hiring practices of the 1960s. Often they have been demoted or passed over and, despite a handsome paycheck, they have to do jobs that they feel are below their capabilities. Even worse, many are being pressured to take early retirement as companies attempt to cut back on the excess of managers. By fighting back in the courts, these middle managers feel they have nothing to lose, says Prof. Eugene E. Jennings a management expert at Michigan State University. ‘Today, middle managers are becoming terribly cynical because there’s no place for them to go,’ he says.”
One of the three men, Edward Mazzotta, a 56-year-old project engineer with Ford, was once a protege of his department head. However, that sponsor was forced to take early retirement and Mr. Mazzotta himself was given unfavorable performance reviews by his new supervisor. “In March 1974, Mr. Mazzotta, then 53, was demoted two pay grades without a cut in pay and transferred to another department. Now, he says, he’s a paper shuffler, doing nothing that any high school graduate couldn’t do’, at a salary of about $35,000 a year. ‘Some people will tolerate a lot of abuse before they do anything: They’ll sit there and take the money. But the desire to feel useful and constructive was too great for me,’ he says. Mr Mazzotta says he tried to appeal his case through Ford’s personnel department, asking for a promotional transfer, but “it was like going to a priest for confession. One you’ve been demoted, it’s unlikely you‘ll ever shake the stigma and be promoted again.”
Another overpaid worker, who was apparently not complaining, worked for the U.S. Department of Agriculture in Washington, D.C.: “Dalton Wilson has a nice salary, a long title and a clean desk. Mr. Wilson, 52, is an assistant to an assistant administrator for management in the Foreign Agricultural Service of the Agriculture Department. The other day, when a reporter dropped in to chat, Mr. Wilson’s desk top held a candy bar, a pack of cigarettes - and Mr. Wilson’s feet. He was tilted back in his chair reading real-estate ads in the Washington Post. Exactly what, the reporter asked, does a man with that title do? ‘You mean, what am I supposed to do?’ said Mr. Wilson with a chuckle. ‘Let me tell you what I did last year.’ It turns out that Mr. Wilson, whose annual pay is more than $28,000, spent the entire year trying to assess the adequacy and timeliness of the department’s fats and oils publications. He says 1977 is shaping up as another slow year; he is planning another study, this one designed to justify the use of satellites to forecast crop production.”
“Mr. Wilson’s pace is typical of life at the Agriculture Department,” the article continued. “With 80,000 full-time employes, the department has one bureaucrat for every 34 U.S. farmers ... As the number of farmers has declined in recent years, the Agriculture Department has turned increasingly to self-promotion and has adroitly managed to continue doing old jobs while thinking up new jobs to do ... The department’s full-time employes, plus 45,000 part-time helpers, occupy five buildings in Washington and spill out across the country into 16,000 others. Its employes direct self-awareness programs for women, write standards for watermelons and measure planted acreage for a dozen crops - even though government limitations on planting no longer exist.”
“Even a casual stroll through the department suggests something is awry. Throughout the main office building, old clocks are stopped at various hours as if time, too, had stopped. At all hours, hundreds of people mill about the corridors or linger in the large, sunny cafeteria. Loafing became such a problem last year that the Secretary’s office sent a memo to supervisors requesting a crackdown on ‘significant problems of attendance in the Washington, D.C. complex’. A second memo went to all employes warning that ‘tardiness, eating breakfast immediately after reporting for work, extended coffee breaks, excessive lunch periods and early departures’ convey a ‘poor image to the public.’”
“Today, laziness is still apparent and is a standard source of humor. Says a young man resting on a bench outside the cafeteria, ‘My only concern about work is breakfast, lunch, two coffee breaks, and being the first one out the door each evening.” Sometimes the humor is unintentional. “I’d like to be sick tomorrow,’ a woman tells her elevator companion, ‘but I can’t. The woman I work with plans to be.” This lackadaisical attitude irks J.P. Bolduc, the department’s top management official. ‘There’s too much deadwood around here,’ he says ... But instead of getting rid of the dead weight, the department rewards it. An internal memo shows that of the 45,000 employes eligible last year for merit pay increases, 44,956 received them ‘We don’t have that many super performers,’ concedes Mr. Bolduc, when asked about the memo.”
IN THE ABSENCE OF A SHORTER WORKWEEK, THE PHENOMENON OF A “SPLIT-LEVEL” RECESSION HAS APPEARED.
In June 1976, the St. Paul Pioneer Press carried a report that “higher-income people are getting richer and feeling good about it, but the economic outlook of poorer Americans is souring, according to economists at the University of Michigan ... ‘For many upper-income families, the recession is over and pretty much forgotten,’ the economists said. ‘Among lower-income families who were more severely affected by inflation and unemployment during the last few years, the recovery of confidence is slow and halting.’ Forty-seven per cent of those who earn over $15,000 said their real earnings had risen over the past year while 23 per cent said they were worse off ... The proportion of lower-income people who said they were better off than a year ago declined to 28 per cent, compared with 36 per cent in the previous survey, taken in February ... The economists said there often is a disparity between the two income groups at this point in an economic recovery, but they noted the split this time was ‘unusually large.’”
The 1973-75 recession was unusual in that it involved a highly selective distribution of suffering. Some called this a “split-level recession” because people experienced it differently at the different socio-economic levels. Some suffered severely; many did not suffer at all. There was also a “split-level” pattern in consumer spending which puzzled some analysts; the consumer no longer behaved in a rational economic manner. Let us see how these experiences were reported in the pages of the Wall Street Journal:
On July 23, 1976, the Wall Street Journal disclosed that many Americans were buying expensive, “top of the line” merchandise even though the economy had not yet fully recovered from the recession. Litton Industries, for instance found that its best-selling model of microwave oven carried a price tag of $1,099 although it had similar models available for $400 less. “Everyone told us we wouldn’t be able to sell a range for $1,100,” said a Litton product manager. “They were wrong.” Customers were having to wait three and four weeks for their $1,100 ranges, though Litton had tripled production. “‘The effect of the recession was bipolar,’ says Steven Star, a professor of marketing at Harvard Business School. ’While many people at the bottom of the economic spectrum were severely hurt, a large segment of people at the top of the income scale weren’t affected - and even prospered. They continue to have the disposable income, and they are turning toward high-priced products.’ All this had led to the current success of makers of $1,100 electric ranges, $14,000 automobiles, $500 microwave ovens, $27 mist curlers, and countless other consumer products bearing price tags regarded as unthinkable only a few years ago.”
Cadillac increased its share of auto sales during that period. Cadillac’s sales through the first 10 days of July were up 37% from a year earlier and up 16% from its previous record year of 1973,” the article reported. “By contrast, total domestic industry sales through July 10 were up 36% from a year earlier but down 14% from the 1973 period.” The bigger cars were generally outselling the smaller models. In Mansfield, Ohio, reported the Wall Street Journal, “the full-sized car is going dynamite ... Among the hottest items ... are the high-priced Caprice, Monte Carlo, and Corvette. And the small Chevette ... is selling well as a second or third family car among affluent youngsters. Yet the other smaller cars at Graham Chevrolet which typically appeal to consumers of more modest means aren’t selling nearly so well. ‘We’ve had all kinds of Novas hanging around,’ Mr. Durchik says. ’And with the Vega and Monza, there’s a lack of demand.’”
One of the fascinating stories from the “split-level recession” concerns the housing industry. In 1974, when the economic signs pointed to a recession, home builders developed a cheaper model, sometimes called “no-frills” housing, which sold for between $20,000 and $30,000. They anticipated a “back-to-the-basics” trend, believing that the simpler homes might appeal to financially hard-pressed consumers. But the “no-frills” house bombed. Those who were buying houses at all preferred the top-of the-market product. Again, the explanation had to do with the polarization of incomes during this period.
The Wall Street Journal speculated: “Consumer rejection of the no-frills house is clearly a factor in the current turn to bigger, fancier homes. The explanation for it, however, lies not so much in personal tastes as in an idiosyncrasy of the economic recovery unforeseen by many home builders and economists. The most likely purchasers of inexpensive, no frills housing are families with annual incomes of $15,000 or less. Yet, they are the people who were hardest hit by the recent recession and who only now are beginning to recover; a new house, analysts believe, is still far down the list of these families’ spending priorities. But among wealthier families, according to the latest sampling of consumer confidence by the University of Michigan’s Survey Research Center, attitudes about home buying are improving sharply. And to this group, experts believe, a no-frills house is a belt-tightening option that no longer seems necessary in today’s brighter economy.”
The other half of the story from the recession concerns the people who did not suffer. They were the people who would have bought the no-frills housing and the sub-compact cars had the money been available. In their own way, these people “behaved.” They foreswore use of credit and found ways to stretch their unemployment checks further. They drove to distant states in search of work, took temporary jobs, and saved what they could from their paychecks. Financial pressures drove a number of them to divorce. Many wives took jobs for the first time in many years. Some people went back to school to train for work in a different field.
Savings banks reported increases in small deposits “It’s the momma-poppa account that seems to go up all the time,” said a banker in Mansfield, Ohio. “The guy with the big account, he’s in and out. The guy who has $25,000 is shoving $5,000 or $10,000 around.” On the other hand, there was the hardware-store proprietor on East Carson Street in Pittsburgh who reported that “people are coming in now with $50 and $100 bills they had stashed away ... I got three $50s and one $100 (in one day) ... They’re starting to spend that stuff.” The Wall Street Journal was moved to comment: “While flashing $50s and $100s in Las Vegas may be a sign of prosperity, in Pittsburgh it means that people are being forced to raid rainy-day reserves to pay for household necessities.”
IN THE ABSENCE OF A SHORTER WORKWEEK, WELFARE REFORM REMAINS A DELUSION.
During his first hundred days in office, President Carter joined the parade of other recent Presidents who have advocated a major overhaul of the welfare system. The President’s proposals recommended such things as public-service jobs for the recipients who are able to work, cash grants to provide “a decent income” for recipients unable to work, and tax credits for the working poor to encourage them to stay off welfare. “The programs should be simpler and easier to administer,”” he said. “There should be incentives to be honest and to eliminate fraud.” The President’s proposals were intended to provide incentives for keeping the family together instead of encouraging desertions and divorce. Recipients should be encouraged to find and keep jobs in the private sector if possible. No one should find it more profitable to stay on welfare than to hold a job.
These are fine ideas but not unlike what has been said and done in previous administrations. For instance Caspar Weinberger, the Secretary of HEW under Presidents Nixon and Ford, advocated the abolition of major welfare programs including AFDC. Despite the obvious merit and urgency of welfare reform, it has one blind spot: What if the jobs which the welfare recipients are meant to take simply do not exist?
It might be useful to recall the experience with Nixon’s “workfare” programs. On an experimental basis, this program was put into effect. In New York State,for instance, legislation was passed requiring able-bodied recipients to pick up their welfare checks at the state employment offices where they might be required to takes jobs which were available. It sounded like a good idea but the plan didn’t work. The Wall Street Journal explained: In New York City, 3,000 welfare recipients were assigned jobs as messengers, clerks, aides, escorts for the elderly or manual laborers on city projects. The work was largely make-work for which the recipients got no other pay than the welfare-checks they would have received in any event. And even these 3,000 workers made up less than 3% of 218,000 unemployed welfare recipients who, presumably, would have been able to work had the economy provided jobs for them - which it hadn’t.”
William Raspberry, a columnist with the Washington Post, criticized President Carter’s proposals for that reason. He wrote: “Implicit in most of the talk about welfare reform is the notion that, with the right combination of sticks and carrots, most of those on the dole - and certainly the able-bodies among them - would go to work. And if they don’t know how to do anything, why, we’ll just teach them. But a look at that 7.1 million on the jobless list drives home the fact that the absence of skills is not the major cause of joblessness. It is the absence of jobs. It is folly to suppose that a semi-literate welfare recipient can find a decent job after six weeks of training when the unemployment offices are full of people who can’t find work with six years of college.”
“So far,” he continued, “Carter has ducked the question of whether he would require welfare recipients to take any work offered them on pain of losing their welfare eligibility. But the question will have to be faced sooner or later, and, when it is, there will be strong pressure for a work requirement. Which says a lot about how we look at things. We sympathize with those jobless ones who have had all the advantages - college education, student loans, and white-collar jobs - often at the direct expense of the taxpayers. In their case, we see clearly that the problem is insufficient work due to a sluggish economy. But for those who have had none of the advantages of schooling or experience, we say: Get a job - sweeping the streets or cleaning other women’s homes or anything else that’s offered. That’s reform? The most encouraging thing about Carter’s plans so far is the notion of wiping out the hodge-podge of bureaucracies administering the variety of cash and kind programs and putting everything under one agency, with the grants being made in one cash payment. That’s efficiency, not cure, but it may be about all we can realistically expect.”
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