Will we start working less?

In this extract from an article by Capital Economics, they review the change in work habits we have now seen and the potential wider impact. In 1930, John Maynard Keynes famously predicted that his grandchildren would be working 15 hours a week. But we doubt that is the personal experience of many people reading this! This is despite the fact that – as Keynes did correctly predict – people have become many times better off over that period. In fact people in developed economies are working more like 35 to 40 hours a week, a world away from Keynes’ vision of a 15 hour week.

The current situation is still a big improvement on that seen a century or two ago. This reflects both a fall in the average workday and a rise in vacations.

However, this fall is partly just a correction of the big increase in working hours during the Industrial Revolution, when firms were reluctant to let their new machinery lie idle for long periods of the day. Historians think that before the Industrial Revolution average hours were much lower. That is even true for the medieval period when workers benefited from lots of religious holidays.

So why has the downward trend stalled? There are various factors at play and we think that it helps to group explanations into three categories.

The first explanation is that the growth of real wages has slowed, meaning that reducing hours has not been possible for many without a drop in living standards. Whilst this slowdown has been seen across advanced economies in recent years, it has been particularly marked in the US.

This partly reflects the slowdown in productivity growth. However real wage growth has generally been even weaker than productivity. This reflects a fall in the share of income flowing to labour rather than capital, due to factors such as globalisation. Moreover, rising inequality has diverted any income gains to the better-off.

Second, even those whose real wages have kept rising have wanted to maintain their hours.

There are a few ways in which things have changed to make people keener to keep working even if their real wages are rising. One is a rise in labour market flexibility with the rise of the gig economy and zero hours contracts. That might have prompted people to work more now in case there is no work available later. There might also have been a more general rise in job insecurity, coinciding with the rise in the global labour supply, driven in part by China’s integration into the global economy. Meanwhile, the rise in longevity may have encouraged people to keep working longer now in order to save for their retirement. There has also been some interesting academic research into why high earners in the US have been increasing their working hours. It is thought that one explanation is a rise in inequality within income groups. This has increased the rewards from working harder and getting a promotion and jumping another rung up the pay ladder. This has been exacerbated by a rise in performance-related compensation systems for high earners. These encourage people to signal their performance by working longer hours especially in professions where output is not easily measured.

Finally, the pressure on firms from governments and trade unions to reduce average working hours has generally eased in the past few decades. There have been several waves of legislation related to working hours in the past couple of centuries. The early to mid-19th century saw the introduction of laws limiting the working hours of children. By the start of the First World War, 10-hour limits on daily working hours for all workers were widespread. This was followed by the first International Labour Organisation Hours of Work Conventions of 1919 and 1930, which set the standard of a 48-hour week with a maximum 8-hour day. By the 1930s, a 40-hour limit was being introduced.

Generally, there has been little legislative push in more recent years towards shorter working hours. Although France brought in a 35 hour working week in 2000, this was effectively dropped in 2008. At the same time the decline in unionisation has also eased the pressure on firms to cut working hours.

So what will happen from here? Is the flattening-off of average hours in the US a sign of what is to come in other countries? Or will the recent pause in the downward trend prove temporary? We think the latter, for various reasons.

First, we are optimistic that productivity and real wage growth will pick up again in the coming years. Second, aside from its impact on productivity and wages, technology could help to facilitate lower working hours. Third, we think that firms could come under renewed pressure to reduce hours worked.

That is not to say that we will suddenly start to see governments legislate to reduce the maximum number of working hours or impose a four day week. But governments could encourage companies to become more flexible, or at least facilitate their efforts to do so.

Even without government involvement, the impetus towards shorter hours may come from companies themselves. The flexible working necessitated by the pandemic could trigger a more adaptable attitude by firms towards working hours.

Of course some people in the future will find their jobs can be done by robots or artificial intelligence. But there will also be a raft of new jobs associated with the new technologies and in most cases artificial intelligence is likely to complement, rather than replace, labour.

Shorter hours could boost motivation and therefore make people more productive during the hours they do work. It could also boost workers’ loyalty to their employer, reducing staff turnover and firms’ hiring and training costs. Indeed, throughout history, productivity (albeit not necessarily overall output) has been shown to increase when working hours are reduced. In 1926, Henry Ford found that productivity and profits increased when he became one of the first employers to introduce a five-day, 40-hour week.

The economic implications of fewer working hours also depend on what people do with their extra leisure time. This could have important consequences for the sectoral composition of economies.

People might just sleep more! But they are also likely to spend more time doing activities that will change the way their spend their money. More time spent watching television or playing video games, for example, could prompt a shift in spending towards technological goods. However, we think that people are most likely to cut their average hours if others are doing so too – with the so-called “social multiplier” making it more enjoyable to have free time when others have it too. In that case, spending on social activities in the leisure sector – from theatres to restaurants – could be the main beneficiary.

Conclusions

Overall, then, we think that the recent hiatus in the downward trend in average hours worked will prove to be temporary. How soon, and at what pace, this downward trend resumes will depend most crucially on productivity growth. And on this, we are relatively positive. Who knows, maybe Keynes will eventually be proved right after all. But even a modest further reduction in hours worked could have big implications for what people do with their time and how they spend their money.

An Extract from 'The Long Run' - Capital Economics, 13th May 2021

Vicky Redwood, Senior Economic Adviser, Capital Economics

The opinions expressed are those of Capital Economics using their independent research and are subject to market or economic changes. This material is not a recommendation, or intended to be relied upon as a forecast.

Past performance is not a reliable guide to future performance.

While every effort has been made to ensure that the data quoted and used for the research behind this document is reliable, there is no guarantee that it is correct, and Capital Economics Limited and its subsidiaries can accept no liability whatsoever in respect of any errors or omissions. This document is a piece of economic research and is not intended to constitute investment advice, nor to solicit dealing in securities or investments.