In a post at the end of 2019, we looked at moves around the world to introduce a four-day working week, with no increase in hours on the days worked and no reduction in weekly pay. Firms would gain if increased worker energy and motivation resulted in a gain in output. They would also gain if fewer hours resulted in lower costs.
Workers would be likely to gain from less stress and burnout and a better work–life balance. What is more, firms’ and workers’ carbon footprint could be reduced.
In New Zealand, Unilever has begun a one-year experiment to allow all 81 of its employees to work one day less each week and no more hours per day. This, it argues, might boost productivity and improve employees’ work-life balance.
The biggest experiment so far has been in Iceland. From 2015 to 2019 more than 2500 people took part in a pilot programme (about 1 per cent of Iceland’s working population). This involved reducing the working week to four days and reducing hours worked from 40 hours per week to 35 or 36 hours with no reduction in weekly pay.
Analysis of the results of the trial, published in July 2021, showed that output remained the same or improved in the majority of workplaces.
As a result of agreements struck with unions since the end of the pilot programme, 86% of Iceland’s workforce have either moved to shorter hours for the same pay or will gain the right to do so.
Many companies and public-sector employers around the world are considering reducing hours or days worked. With working patterns having changed for many employees during the pandemic, employers may now be more open to rethinking ways of deploying their workforce more productively. And this may involve rethinking worker motivation and welfare.
Articles
Report
Questions
- Distinguish between different ways of measuring labour productivity.
- Summarise the results of the Iceland pilot.
- In what ways may reducing working hours reduce a firm’s total costs?
- What are the advantages and disadvantages of the government imposing (at some point in the future) a maximum working week or a four-day week?
- What types of firm might struggle in introducing a four-day week or a substantially reduced number of hours for full-time employees?
- What external benefits and costs might arise from a shorter working week?
One of the major economic concerns about the COVID-19 pandemic has been the likely long-term scarring effects on economies from bankruptcies, a decline in investment, lower spending on research and development, a loss of skills, discouragement of workers, disruption to education, etc. The result would be a decline in potential output or, at best, a slower growth. These persistent effects are known as ‘hysteresis’ – an effect that persists after the original cause has disappeared.
In a speech by Dave Ramsden, the Bank of England’s Deputy Governor for Markets & Banking, he argued that, according to MPC estimates, the pandemic will have caused a loss of potential output of 1.75%. This shortfall may seem small at first sight, so does it matter? According to Ramsden:
The answer is definitely yes for two reasons. First, a 1¾% shortfall as a share of annual GDP for the UK … represents roughly £39 billion – for context, that’s about half of the education budget. And second, that 1¾% represents a permanent shortfall, or at least a very persistent one, on top of the impact of the immediate downturn. If you lose 1¾% of GDP every year for ten years, then in total you have lost 17.5% of one year’s GDP, or around £390bn in 2019 terms
However, as the IMF blog linked below argues, there may be positive supply-side effects which outweigh these scarring effects, causing a net rise in potential GDP growth. There are two possible reasons for this.
The first is that the pandemic may have hastened the process of digitalisation and automation. Examples include ‘video conferencing and file sharing applications to drones and data-mining technologies’. According to evidence from a sample of 15 countries cited in the blog, a 10% rise in such intangible capital investment is associated with about a 4½% rise in labour productivity. ‘As COVID-19 recedes, the firms which invested in intangible assets, such as digital technologies and patents may see higher productivity as a result.’
The second is a reallocation of workers and capital to more productive sectors. Firms in some sectors, such as leisure, hospitality and retail, have relatively low labour productivity. Many parts of these industries have declined during the pandemic, especially those with high labour intensity. At the same time, there has been a rise in employment in firms where output per worker is higher. Such sectors include e-commerce and those where remote working is possible. The greater the reallocation from low labour-productivity to high labour-productivity sectors, the more will overall labour productivity rise and hence the more will potential output increase.
The size of these two effects will depend to a large extent on expectations, incentives and government policy. The blog cites four types of policy that can help investment and reallocation.
- Improved insolvency and restructuring procedures to enable capital in failed firms to be reallocated to sectors with potential for growth.
- Promoting competition to enable the exit and entry of firms into expanding sectors and to prevent powerful firms from blocking the process.
- Refocusing policy from retaining labour in existing jobs to reskilling workers for new jobs, thereby improving labour mobility from declining to expanding sectors.
- Addressing financial bottlenecks, so as to ensure adequate access to financing for viable firms.
Whether there will be a net increase or decrease in productivity from the pandemic very much depends on the extent to which firms and workers are able and willing to take advantage of new opportunities and the extent to which government supports investment in and reallocation to high-productivity sectors.
Blogs, articles and speeches
Questions
- Can actual economic growth be greater than potential economic growth (a) in the short run; (b) in the long run?
- Give some example of scarring effects from the COVID-19 pandemic.
- What effects might short-term policies to tackle the recession caused by the pandemic have on longer-term potential economic growth?
- What practical policies could governments adopt to encourage the positive supply-side effects of the pandemic? To what extent would these policies have negative short-term effects?
- Why might (endogenous) financial crises result in larger and more persistent reductions in potential output than exogenous crises, such as a pandemic or a war?
- Distinguish between interventionist and market-orientated supply-side policies to encourage the reallocation of labour and capital to higher-productivity sectors.
Since the financial crisis of 2008–9, the UK has experienced the lowest growth in productivity for the past 250 years. This is the conclusion of a recent paper published in the National Institute Economics Review. Titled, Is the UK Productivity Slowdown Unprecedented, the authors, Nicholas Crafts of the University of Sussex and Terence C Mills of Loughborough University, argue that ‘the current productivity slowdown has resulted in productivity being 19.7 per cent below the pre-2008 trend path in 2018. This is nearly double the previous worst productivity shortfall ten years after the start of a downturn.’
According to ONS figures, productivity (output per hour worked) peaked in 2007 Q4. It did not regain this level until 2011 Q1 and by 2019 Q3 was still only 2.4% above the 2007 Q4 level. This represents an average annual growth rate over the period of just 0.28%. By contrast, the average annual growth rate of productivity for the 35 years prior to 2007 was 2.30%.
The chart illustrates this and shows the productivity gap, which is the amount by which output per hour is below trend output per hour from 1971 to 2007. By 2019 Q3 this gap was 27.5%. (Click here for a PowerPoint of the chart.) Clearly, this lack of growth in productivity over the past 12 years has severe implications for living standards. Labour productivity is a key determinant of potential GDP, which, in turn, is the major limiter of actual GDP.
Crafts and Mills explore the reasons for this dramatic slowdown in productivity. They identify three primary reasons.
The first is a slowdown in the impact of developments in ICT on productivity. The office and production revolutions that developments in computing and its uses had brought about have now become universal. New developments in ICT are now largely in terms of greater speed of computing and greater sophistication of software. Perhaps with an acceleration in the development of artificial intelligence and robotics, productivity growth may well increase in the relatively near future (see third article below).
The second cause is the prolonged impact of the banking crisis, with banks more cautious about lending and firms more cautious about borrowing for investment. What is more, the decline in investment directly impacts on potential output, and layoffs or restructuring can leave people with redundant skills. There is a hysteresis effect.
The third cause identified by Crafts and Mills is Brexit. Brexit and the uncertainty surrounding it has resulted in a decline in investment and ‘a diversion of top-management time towards Brexit planning and a relative shrinking of highly-productive exporters compared with less productive domestically orientated firms’.
Articles
Paper
Questions
- How suitable is output (GDP) per hour as a measure of labour productivity?
- Compare this measure of productivity with other measures.
- According to Crafts and Mills, what is the size of the impact of each of their three explanations of the productivity slowdown?
- Would you expect the growth in productivity to return to pre-2007 levels over the coming years? Explain.
- Explain the underlying model for obtaining trend productivity growth rates used by Crafts and Mills.
- Explain and comment on each of the six figures in the Crafts and Mills paper.
- What policies should the government adopt to increase productivity growth?
A lack of productivity growth has been a major problem for the UK economy over the past decade (click here for a PowerPoint of the chart). Is it possible that the new decade may see a pick-up in the growth in output per hour worked?
One possible solution to low productivity growth is to reduce working hours and even to move to a four-day week, but not to reduce total pay. If people work fewer hours, they may well be more productive in the hours they do work. In fact, not only may output per hour increase, but so too may output per worker, despite fewer hours being worked. What is more, the quality of output may increase with people being less tired and more motivated.
Several companies have experimented with a four-day week, including Microsoft in Japan, which employees 2300 workers. It found that, despite a 20% reduction in hours worked, output per hour worked increased by 40%, with total output thereby increasing. Workers were generally happier and more motivated and asked for fewer days off.
And it is not just a question of output: fewer hours can result in lower costs. The effect on costs will depend on the nature of new work patterns, including whether everyone has the same extra day off.
But a four-day week is only one way of cutting working hours for full-time employees. Another is to reduce the length of the working day. The argument is that people may work more efficiently if the standard working day is cut from eight to, say, five hours. As the first Thrive Global article article (linked below) states:
Just because you’re at your desk for eight hours doesn’t mean you’re being productive. Even the best employees probably only accomplish two to three hours of actual work. The five-hour day is about managing human energy more efficiently by working in bursts over a shorter period.
If people have more leisure time, this could provide a boost to the leisure and other industries. According to a Henley Business School study:
An extra day off could have a knock-on effect for the wider society. We found 54% of employees said they would spend their day shopping, meaning a potential boost for the high street, 43% would go to the cinema or theatre and 39% would eat out at restaurants.
What is more, many people would be likely to use the extra time productively, undertaking training, volunteering or other socially useful activities. Also family life is likely to improve, with people spending less time at work and commuting and having more time for their partners, children, other relatives and friends. In addition, people’s physical and mental health is likely to improve as they achieve a better work-life balance.
So, should firms be encouraged to reduce hours for full-time workers with no loss of pay? Many firms may need no encouragement at all if they can see from the example of others that it is in their interests. But many firms may find it difficult, especially if their suppliers and/or customers are sticking with ‘normal’ working hours and want to do business during those hours. But, over time, as more firms move in this direction, so it will become increasingly in the interests of others to follow suit.
In the meantime, should the government introduce incentives (such as tax breaks) or regulations to limit the working week? Indeed, it was part of the Labour manifesto for the December 2019 election that the country should, over time, move to a four-day week. Although this was a long-term goal, it would probably have involved the use of some incentives to encourage employers to move in that direction or the gradual introduction of limits on the number of hours or days per week that people could work in a particular job. It is unlikely that the new Conservative government will introduce any specific measures, but would probably not want to discourage firms from reducing working hours, especially if it is accompanied by increased output per worker.
But despite the gains, there are some problems with reduced working hours. Many small businesses, such as shops, restaurants and firms offering technical support, may not have the flexibility to offer reduced hours, or may find it hard to increase productivity when there is a specific amount of work that needs doing, such as serving customers.
Another problem concerns businesses where the output of individuals is not easy to measure because they are part of a team. Reducing hours or the working week may not make such people work harder if they can ‘get way with it’. Not everyone is likely to be motivated by fewer hours to work harder.
Then there is the problem if reduced hours don’t work in boosting productivity. It may then be very difficult to reintroduce longer hours.
But, despite these problems, there are many firms where substantial gains in productivity could be made by restructuring work in a way that reduces hours worked. We may see more and more examples as the decade progresses.
Podcast
Articles
- Economics of a four-day working week: research shows it can save businesses mone
The Conversation, Miriam Marra (11/11/19)
- Less hours for work, more time on Earth: Why a four-day working week is good for you
Independent, Steve Taylor (16/12/19)
- Microsoft Japan Launched A Four-Day Workweek To Much Success: Is This The Key To Attracting Talent In The Tight U.S. Job Market?
Forbes, Jack Kelly (5/11/19)
- Will The Five-Hour Work Day Catch On In America?
Forbes, Jack Kelly (28/10/19)
- My Company Implemented a 5-Hour Workday — and the Results Have Been Astounding
Thrive Global, Stephan Aarstol (3/10/19)
- Why Does a Four-Day Work Week Achieve Better Results?
Thrive Global, Stephanie Lin (16/12/19)
- Four-Day Working Week Improves Staff’s Mental Health By 87%, Company Finds
Unilad, Niamh Shackleton (10/12/19)
- Hull business launches four-day working week as well as your birthday off and ‘Beer Fridays’
Hull Live, Phil Winter (5/12/19)
- A four-day work week? Sounds nice, but here’s the real deal
Sydney Morning Herald, Tony Featherstone (21/11/19)
- The four-day debate: Fantasy or feasible?
The Hindu, Business Live, Kamal Karanth (20/11/19)
- Finland’s ministry of transport floats tech-enabled four-day week
Computer Weekly, Gerard O’Dwyer (20/11/19)
- Should You Consider a 4 Day Work Week?
Small Business Trends, Rob Starr (5/12/19)
Report
Questions
- Distinguish between different ways of measuring labour productivity.
- Give some examples (from the linked references) of employers which have tried introducing a four-day week or reduced hours for full-time workers. What has been the outcome in each case?
- In what ways may reducing working hours reduce a firm’s total costs?
- What are the advantages and disadvantages of the government imposing (at some point in the future) a maximum working week or a four-day week?
- What types of firm might struggle in introducing a four-day week or a substantially reduced number of hours for full-time employees?
- What external benefits and costs might arise from a shorter working week?
Latest resesarch from the independent American think tank The Conference Board paints a worrying picture about the growth of UK labour productivity. While global growth in labour productivity has weakened following the financial crisis, its weakness in the UK is singled out in the Board’s 2019 Productivity Brief. It finds that amongst large mature economies the decline in labour productivity growth rates has been greatest in the UK. This has important implications for the country’s longer-term well-being and, specifically, it peoples’ living standards.
The UK saw the growth in real GDP (national output) fall from 1.8 per cent in 2017 to 1.4 per cent in 2018. The Conference Board predicts that this will fall further to 0.8 per cent in 2019. In the context of living standards, the growth in real GDP per capita is particularly important. An increase in the population will, other things being equal, lower living standards because more people will be sharing a given amount of real national income. The growth in real GDP per capita fell from 1.1 per cent in 2017 to 0.7 per cent in 2018 and is predicted to fall to just 0.1 per cent in 2019.
Chart 1 shows the annual rates of growth in real GDP and real GDP per capita from the 1950s. The average growth rates are 2.4 and 1.9 per cent respectively. The other series shown is the annual growth in real GDP per person employed. This is a measure of the growth in labour productivity. Its average annual growth rate is also 1.9 per cent. This illustrates the intrinsic long-run relationship between labour productivity growth and the growth rate of GDP per capita and hence in general living stanadards. (Click here to download a PowerPoint copy of the chart.)
In the short term, rates of growth in output per worker (labour productivity) and GDP per capita (general living standards) can be less similar. For example, when unemployment rates rise labour productivity rates may be little affected despite GDP per capita falling. Nonetheless, the important point here is the close long-run relationship between the growth in labour productivity and GDP per capita. This then raises an important question: what factors contribute to the growth in output and labour productivity?
An approach known as growth accounting helps to identify four key contributors to the growth of total output. The first is the quantity of labour, commonly measured in labour hours. The second is the quality of labour, also known as labour composition. Third is capital services which are physical inputs into production and include machinery, structures and IT capital. Capital services are affected by quantity and quality, but, unlike labour, it is practically more difficult to separate out these dimensions. Fourth, is Total Factor Productivity (TFP).
TFP it is essentially the residual contribution to output growth that cannot be explained by changes in the quantity and quality of the individual inputs. Hence, in principle, it is capturing changes in how effectively the labour and capital inputs are being employed and combined in production. The Conference Board’s Productivity Brief describes the growth in TFP as providing ‘a more accurate picture of the overall efficiency by which capital, labour and skills are combined in the production process’.
Chart 2 shows Conference Board estimates of the percentage point contribution of these four sources of growth since 1990. Over this period, output growth averaged 2 per cent per year. The contribution of capital services and, hence, what is known as capital accumulation is particularly significant at 1.5 percentage points per year. This has been significantly larger than the contribution of labour hours which averaged only 0.3 percentage points per year since 1990. This evidences the importance played by capital deepening for output growth in the UK. (Click here to download a PowerPoint copy of the chart.)
Capital deepening captures the growth in capital services relative to the growth in the labour input. It takes on even greater significance when we think about the growth in labour productivity since, after all, this is the growth in output relative to the quantity of labour. It is significant though that since 2015 the growth of capital services has contributed only 1 percentage point to output growth while the growth of labour hours has contributed an average of 0.7 percentage points. This points to a slowdown in capital deepening and hence in the growth of labour productivity.
Chart 2 also illustrates the importance of TFP growth to overall output growth. It is also important (along with capital deepening and the growth in labour quality) for the growth in labour productivity. Interestingly, we observe significant fluctuations in the growth of TFP. This is thought to reflect fluctuations in the utilisation of inputs. For example, if the utilisation of inputs falls (rises) when output falls (increases) this will be mirrored by a disproportionately large fall (increase) in TFP. In the longer-term, however, changes in TFP capture aspects of technological progress and advancement that enable more effective production methods and techniques to be deployed. In other words, the growth of TFP captures the ability of production to benefit from the advancement in ideas, products, processes and know-how.
A decline in the growth in TFP growth following the financial crisis is found quite widely in mature economies. The annual rate of growth of TFP across mature economies fell from 0.5 per cent year in 2000-2007 to 0.2 per cent in 2010-2017. In the UK this fall was from 0.5 per cent to -0.1 per cent. Hence, the decline in TFP growth of 0.6 percentage points between 2010 and 2017 was double the 0.3 percentage point fall across all mature economies. In 2018 the Conference Board estimate that TFP in the UK fell by 0.1 percent further exacerbating the downward pressure on labour productivity.
As our final chart shows, it is the magnitude to which labour productivity has eased following the financial crisis that sets the UK apart. While across all mature economies the growth of output per labour hour (another measure of labour productivity growth) fell from an average of 2.3 per cent per year in 2000-2007 to 1.2 per cent in 2010-2017, in the UK the fall was from 2.2 per cent to 0.5 per cent per year. (Click here to download a PowerPoint copy of the chart.)
While the productivity problem facing the UK is not new, the latest figures comes as a very timely reminder of the extent of the problem. To some extent the uncertainty around Brexit and the negative impact on capital accumulation has only helped to exacerbate the problem. But, this may mask a more systemic problem facing the UK. Getting to the root of this problem matters. It matters most significantly for our long-term wellbeing and prosperity. The productivity gap with our major industrial competitors is a gap that policymakers need not only to be mindful of but one that needs closing.
Articles
Questions
- What do you understand by the term labour productivity. How could we measure it?
- Why is it important to look at the growth of output per capita when assessing the benefits of long-term growth?
- Why is labour productivity important for the long-term well-being of a country?
- What do you understand by the method of growth accounting?
- What is the distinction between capital accumulation and capital deepening?
- What might explain why the growth of labour productivity has been lower in the years following the post-financial crisis?
- What do you understand by Total Factor Productivity (TFP)?
- What does the long-term growth of TFP attempt to capture?
- If you were an economic advisor to the government, what types of policy initiatives might you recommend for a government concerned about low rates of growth of labour productivity?
