Shorter Weeks, Longer Vacations
from Dean Baker
The United States is suffering the enduring effects of a collapsed housing bubble, not a financial crisis. This is an important distinction, because it points to the necessity of relying on shorter workweeks and longer vacations to return to full employment.
The financial crisis is largely irrelevant to the economy’s current weakness. The problem is that the demand that was created by $8 trillion in housing bubble wealth cannot be easily replaced. The bubbles generated more than $600 billion in annual demand in construction that has now been lost. The imaginary equity created by bubble-inflated house prices led to a consumption boom that pushed the saving rate to zero. Now that this wealth has vanished, so has the consumption that it fueled.
This leaves a gap of more than $1.2 trillion in annual demand. In the short term, this can be filled only by government deficits. In the longer term, the demand gap will have to be filled by a reduction in the U.S. trade deficit, but this requires a large fall in the value of the dollar.
With neither the prospect of much larger deficits nor a sharp decline in the value of the dollar very likely in the near future, the only remaining option is to share the work. This could be accomplished by changing employers’ incentives so that it is more profitable to reduce work hours than to lay people off.
Every month, companies lay off or fire two million workers. If firms could be persuaded to keep just 10 percent of these workers employed working fewer hours, it would be equivalent to creating 200,000 jobs a month.
If unemployment insurance benefits were used to subsidize short workweeks, so that people were compensated for part of their lost time (e.g. a worker who puts in 20 percent fewer hours gets 10 percent less pay), then many firms might opt to go the route of shortening work hours. This policy has been so successful in Germany that its unemployment rate has actually fallen since the start of the downturn, even though its growth has been no better than growth in the U.S.
Policy can also promote longer vacations, family and parental leave, and paid sick days — all mechanisms for making the workplace more family friendly. There seems to be no way to avoid the fact that we are destined to have a prolonged period in which the economy is operating below its potential output. It makes much more sense to turn this into leisure that can be enjoyed by everyone, rather than unemployment that is suffered by an unlucky minority of the work force.
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Real-World Economics Review Blog 
If the hours worked are reduced but the benefits-in-kind (medical insurance, pensions) are the same, then the cost of a labor hour is increased, and with an artificially higher real wage, employment would decline. That’s the problem with treating symptoms rather than the cause of economic disease.
but Fred … if employers could be cajoled into doing this in the short run employment would rise, consumption would increase … it is a feed back loop which humans in general do not understand … we are in the down loop which is the CAUSE if nothing is done and for some long time i fear
by the way in the longer term of course employers and employees must find ways to lower medical, retirement and unemployment costs to the employer. But in the last 2 decades employers have done much better than employees economically so the complaint rings just a little hollow in the current situation.
Given that workers have been asked to ‘do more with less’ (.ie higher productivity) for a sustained 10yr. period, and layoffs have been ongoing in the shorter term – we’ve got a very long way to go before real wages rise.
Right on, Lucy. Also, the idea of a shorter workweek established via social cooperation in the underground economy is probably a more likely evolutionary path toward a new and sustainable culture than seeking cooperation from the corporate economy.
The scale of conspicuous consumption housing in the inventory is an unfortunate qualitative aspect to consider. And, doesn’t the strangle on real wages to productivity date back as far as the late 1970’s ?
I really domt know that the housing bubble is the prima facie culprit here. Was the financial markets along with all our “impounded” wage scarificied to super the prima facie culprit (what a big injections that has been to financial sector firms and how safe was it – when guaranteed every week by law – pretty risk free injection into one industry)? Chicken or egg. Im inclinded to think the argument that the government cant pick winners, applies in the case of getting everyone to save for their own super under the watchful eye of …oops the accidentally fattened super industry which led to the overblown financial sector…which led to the profusion of cheap loans for housing …which led to the housing bubble…which led to toxic debts in the form of CD)s…which led to the crash and false recovery and new crash…
Was it really the housing crash or was it financial sector over protection that did it?
The origin of the financial crash was subsidy to land value. The real estate bubble was a bubble in the price of land. The rise in the price of land is generated by monetary and fiscal subsidies. If 90 percent of the land rent and land value were taxed, the price of land would fall to near zero, mortgages would instead be based on the stable value of buildings, and the financial derivatives would not have been a house of cards that collapsed when land values plunged.
The origin of the financial crash was not land subsidies.
Lucy – I dont think so either. It wasnt land subsidies at all. I happen to think the only and he happens to think the US right has chucked the steering wheel of economy out the window and are driving like lunatics.We all know the wealthy have been given enormous tax breaks over the past three decades (and even Buffet acknowledges this) but through super the financial sector (which is now bloated) has also been given our defacto wages as guaranteed income since the late 1980s. Nothing quite like protection.
The result is an obese financial sector with too much money chasing too few shares which leads to bubble land. Some of that money, in more sensible days would have been used by governments as tax income but instead the incomes of the wealthy has quintuplued since 1990 as Buffet notes. He also notes they had no trouble trickling down when tax rates were much higher and it begs the question, has all that untaxed money fuelled a casino and a fat financial sector??. The poor will always be relatively protected, the rich – well they are so so so much richer so they are doing just fine thankyou. The one’s really in trouble and carrying the can for this mess are America’s middle classes, more and more of whom fall into the food stamp queues every day…and that is not sustainable. It is time to look at both sides of what feeds a budget and that doesnt mean listening to the politco right tea parties (and repugs), who have chucked the steering wheel out the window and latched on to only one side of the problem (they want low or no taxes on the rich and all until it kills the economy stone dead).
Even Buffet admits US social security paid him $36,000 (Ishock horror) dollars last year and he doesnt need it. The tax and transfer system is obviously stuffed, big time in the US.
Below comment should say – I think the only person making economic sense right now is Warren Buffet (and he thinks the right tea partiers and their cohort has chucked the steering wheel out the window and are driving like lunatics – so obessed they are with only one side of the budget equation etc).
June 17, 2010:
´Australia just passed a law that guarantees 18 weeks of paid leave for parents, meaning that the United States is now the only industrialized nation without paid parental leave, reports NPR.
Of course, there are other countries that don’t offer this benefit: there’s no paid leave in Lesotho, Papua New Guinea, and Swaziland.´
http://www.mediabistro.com/mediajobsdaily/u-s-now-only-industrialized-nation-without-mandatory-paid-parental-leave_b2819
But I do agree with Fred (and Dean, according to other articles of him) that such measures are no free lunches. I´m however also becoming septic of the quality of American entrepreneurs, who do not seem to be able to manage anything without higher incomes, lower taxes, presidents which bend over backwards to please them and whatever. German; French, greek and spanish opnes seem to be much better
´septic´ shoud read ´sceptic´
If you mean by ‘entrepreneurs’ small business – then I would point-out they get little to no help from G, and start businesses regardless of T and/or incomes.
If you mean by ‘entrepreneurs’ American big business, like banks, I agree, they’ve turned the whole country septic.
Extending EITC to really subsidize part-time work would help
Alice, Lucy
Do you really believe that it was the increasing value of building materials/services which produced the bubble? If you accept that it is in fact the land value which was increasing (the stuff that we can’t manufacture more of to meet demand) then you have to look at the role of land in the economy. It’s time that economists went back to the drawing board (or started to read Henry George).