Thursday, September 4, 2008

Apparently you really can't get something for nothing

It appears that France is ending its decade-long experiment with 35-hour work week. This law, enacted in 1998, capped work weeks at 35-hours, requiring overtime pay for additional hours.

The theory behind this law was simple: capping worker hours would necessitate more workers to complete the same amount of work, thus creating more jobs. After all, if you cut your work week from 39 hours to 35 hours, someone has to make up those extra 4 hours, right? It is also appealing to policy-makers, since it suggests that you can increase employment for free.

Unfortunately, it's not that simple. This argument is known to economists as the lump of labor fallacy. As Charles Wheelen explains:
"Like most bad economic ideas that persist over time, the notion of a "lump of labor" has a certain intuitive appeal. The French policy assumes that the amount of work to be done in a modern economy is fixed, like a pie, and that cutting that work into smaller pieces -- fewer hours per week -- will provide slices for more people. If you've got six pieces of maple pecan pie to feed 12 people at Thanksgiving, then just cut each slice in half, right?

Not exactly. Requiring 39 hours of pay for 35 hours on the job makes workers more expensive relative to what they produce -- not unlike raising the minimum wage in the U.S. If workers become more expensive, firms will hire fewer of them, not more. French unemployment remains near 10%, roughly twice the rate in the U.S."
So which theory is borne out? Fortunately, since the law was phased in over time, it created a kind of "natural experiment". While large firms had to adopt the law immediately, smaller firms were given a few years as a grace period. According to Marcello M. Estevão of the IMF and Filipa Sá of MIT, comparing the experiences of the two groups shows that the law did not boost employment. While employment after the law increased throughout France, it did so in both large and small firms, suggesting that any increase in employment was do to factors other than the 35-hour mandate.

Most aspects of the economy are not zero-sum; if one worker gains a job, it does not have to come at the expense of another worker. Employment and living standards are based on productivity, which allows us to get more out of the resources we have. The number of jobs is not fixed and we shouldn't treat it as such.

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