Toward an efficiency week - correlation between shorter workweek and higher productivity

Challenge,  Jan-Feb, 1999  by Robert LaJeunesse

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If workers work shorter hours, will they work harder? This author thinks a shorter workweek will lead to higher productivity.

Before the emergence and widespread acceptance of the efficiency-wage hypothesis, it was believed that increased productivity led to dividends being paid to workers in two basic forms: higher real wages or reduced working hours. The efficiency-wage theory, however, reversed the arrow of causation between the two variables by purporting sound reasons why higher wages may be a cause of higher productivity as well as a result. The premise of this article is that productivity advances are also correlated with the other significant determinant of labor productivity - work duration. Thus, just as an efficiently high wage may lower per-unit labor costs, so might judiciously determined workweeks.

Most workweek reductions - such as France's recent decision to implement a thirty-five-hour workweek by the year 2000 - are proffered with an eye toward ameliorating unemployment. Although stabilizing employment is a worthy and valid objective of reduced workweeks, the efficiency-week hypothesis predicts far greater benefits. The theory asserts that an optimum number of hours worked per week will increase the immediate productivity of the labor force as well as the productivity of future generations. Thus, the efficiency-week hypothesis does more than provide unemployment relief. It bolsters the productivity of current workers, as well as their children's productivity, by affording the family the time to "live wisely and agreeably well" (Keynes, 1978).

In 1914, Henry Ford made an announcement that sent shock waves through both the economics profession and the business community: The minimum wage in his industries would be $5.00 for an eight-hour day. At the time, $2.50 for a ten-hour day was considered generous compensation. Since Ford's epiphany, the expression "$5 day" has become an economic standard and a foundation for the ascendancy of efficiency-wage theories. However, the economics profession has overlooked a second virtue in Ford's policy - the reduction of work time.

The virtues of shorter work times are not unlike those of higher wages, but they are more numerous. The macroeconomic benefits include the fact that workers will have more time to consume a greater volume of goods and to develop sophisticated tastes for more expensive goods. As Ford predicted in 1926, "the short week is bound to come because without it the country will not be able to absorb its production and stay prosperous" (Crowther, 1926). The efficiency-week hypothesis is more than a short-term boost for aggregate demand. The increased social productivity that results from reduced work times can create long-term improvements in the standard of living. In the short term, workers become more productive, and in the long run, future generations benefit from the human-capital investments made by their nonharried parents.

Efficiency-Wage Theories as a Springboard to the Efficiency-"Week" Hypothesis

In The Wealth of Nations the protean Adam Smith commented on the fact that higher wages would lead to increased industry among the working class. However, Smith admonished that the sedulous work habits of higher-paid workers would result in a spate of infirmities. At the end of the day; a debilitated worker would have lower levels of output, and per-unit labor costs would be correspondingly higher. Since Adam Smith published his magnum opus, economists have come to realize that efficiently high wage rates can increase productivity without the attendant injuries to the workforce. Thus, per-unit labor costs - the sine qua non of capitalists - can often be lowered by paying an efficiently determined wage.

Before Ford's "$5-day lesson," big business adamantly opposed higher wages. An increase in the factor cost of labor, it was argued, would prescribe a curtailment of production. The reduction in output would maim the very workers it intended to benefit. What these myopic opponents of higher wages were not grasping was the aggregate demand effects and productivity gains that abound from well-paid workers.

In its simplest form the efficiency-wage hypothesis states that labor productivity depends on the real wage paid by the firm. As George Akerloff and Janet Yellen (1984) pointed out, "If wage cuts harm productivity, then cutting wages may end up raising labor costs." The productivity gains attributable to the employee primarily result from greater incentives to work coupled with a diminished incentive to shirk. However, employers can also raise the productivity by using higher wages to reduce turnover, improve morale, decrease monitoring costs, and attract superior job applicants (Akerloff and Yellen, 1984; Stoft, 1982).

The link between labor productivity and the real wage paid by firms is perhaps most apparent in the less developed countries. In this setting, it is obvious how higher wages can abate such productivity drags as malnutrition and illness. The understanding is rather intuitive when extended to the developed countries, as we can imagine such productivity enhancements as training, wellness investments, and even psychiatric help being financed out of higher wages. However, most models pertaining to industrialized economies emphasize the productivity gains reaped from a reduction in shirking and labor turnover.