27 September 2019

Labour’s 4-day week plan won’t work


John McDonnell has promised that a Labour government would reduce the average full-time working week to 32 hours within a decade, with no loss of pay. This would allow many people to work four days a week, rather than five or more, and enjoy a better quality of life. What’s not to like? Unfortunately, rather a lot – at least in the way that Labour would go about it.

The intellectual justification for government intervention is laid out in a report that McDonnell commissioned from the economic historian, Lord Skidelsky. As it happens, the report is more cautious on what can be achieved in practice.

Initially, Skidelsky was asked ‘to inquire into the feasibility of legislation to limit hours of work’. The crude exercise of state power does seem to be the first resort of the current Labour leadership. The good news is that his report argues against this option, largely based on the experience of France, where the imposition of a ‘one-size-fits-all’ 35-hour week has clearly done more harm than good.

The Skidelsky report also emphasises that past reductions in working hours have been made possible by productivity growth which may be hard to repeat in future, especially in an increasingly services-led economy where there could be less scope for gains from mechanisation.

However, this is where I think Skidelsky starts to go wrong. First, he suggests that average hours worked ‘have stagnated since 1980’. This appears to be an exaggeration even on the figures presented in his report. In reality, average hours worked have continued to fall, albeit at a slower pace than before.

More importantly, his policy recommendations go awry. He correctly identifies the drag from sluggish growth in productivity over this period. But he ends up putting most emphasis on the decline in collective bargaining. In his words, ‘Union activism has given a strong push to historical reductions in hours worked. In the UK of the 1950s and 1960s, trade unions were able to negotiate shorter working hours together with higher wages’.

Skidelsky’s solutions are therefore based around more trade union power and more government intervention, including the imposition of sectoral collective bargaining and the use of public sector procurement contracts to dictate pay, conditions and hours. As he also says, ‘the weakening of trade unions has played a key part in increasing labour flexibility’, which in Labour’s world is a bad thing.

To be fair, Skidelsky concedes that his proposals could be criticised on the grounds that ‘they set up bureaucratic and collective mechanisms for achieving outcomes which should be left to the market. This is based on the argument that competitive markets allow workers to ‘choose’ how many hours they want to work, just as they allow them to ‘choose’ how much they want to be ‘trained’ for different jobs and pay levels.

Well, quite so. One of the great strengths of a flexible labour market is that most people can chose jobs, hours and patterns of work that suit their personal circumstances. Skidelsky dismisses this alternative as ‘an idealised world where there are no market imperfections or public goods’. That is a straw man. Of course, markets do not always work perfectly, but they can do a much better job than socialist planners or trade union barons. What’s more, market imperfections are often the result of too much state intervention, rather than too little.

But let’s suppose Labour has the answer. Would it actually be possible to reduce the working week to 32 hours with no loss of pay? The one certainty is that this would require extraordinary gains in productivity, especially if employees still wanted their pay to increase too. In practice, this reduction could only be imposed at substantial cost to the economy, jobs and public services.

Some back-of-the-envelope calculations might help illustrate the problem here. Skidelsky favours Eurostat data suggesting that the ‘usual’ hours worked by full-time employees in the UK are 42.5 per week. If a worker was obliged to produce the same amount in just 32 hours, their output per hour would have to increase by around a third. That might be possible in a few sectors, perhaps helped by labour-augmenting automation, but is simply implausible across the economy as a whole.

Suppose instead we use the lower ONS figure of 37.1 hours (which takes account of holidays and other absences). Productivity would still have to increase by more than 15% to maintain output. If economy-wide output per hour only rose by a still ambitious 10%, GDP would be 5% lower than it would otherwise have been.

Of course, firms could make up the some of the shortfall by taking on more workers, but the economy is already close to full employment. And even if there were lots of people looking for work, the hourly cost of employing them would be higher relative to the value they are able to create. Firms would either have to operate at a loss, or, more likely, they would choose to cut production and jobs in the UK, including by relocating overseas.

Public services would be particularly hard hit. As Len Shackleton explains, people working as heart surgeons or firefighters will find it almost impossible to do all their work in less time. More people will have to be employed in these roles, at substantial cost to the taxpayer.

In short, politicians should not promise what they cannot deliver. Restricting labour market flexibility, including by imposing a clunky system of collective bargaining, is unlikely to do anything to deliver the productivity gains necessary to boost real wages, or cut the hours of those that want a shorter working week.

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Julian Jessop is an independent economist