"Thinking along the Right Lines": Creating Jobs through

Longer Workweeks and Later Retirement

ABSTRACT

One of the most frequently derided fallacies in economics is the idea that there

is a limited amount of work that can be done. This implicit assumption, known to

economists as the lump-of-labor fallacy, fosters "the illusion that shorter hours

will reduce unemployment" (Taylor 1997). Curiously, though, in spite of perennial

reference to the fallacy, there have been few attempts at articulating a counter-

lump-of-labor job creation strategy. If it is an illusion that shorter hours or early

retirement can reduce unemployment, why not create jobs by extending the

workweek and prolonging working life?

This proposal takes its inspiration from a little known paper by William H. Hutt,

"Full Employment and the Future of Industry," published at the close of World

War II. It is proposed here to relax the overtime provision of the Fair Labor

Standards Act to its pre-1940 level of 44 hours a week, to postpone the Social

Security retirement eligibility age to 70 years, to expand the quota of H-1B work

visas and to lift the ban on the employment of children under the age of 14.

Those first three items are estimated to stimulate the direct creation of 4,249,000

jobs over two years and add $936 billion to GDP. The cost of implementing the

policy would be minimal. An even broader expansion of employment and output

may be anticipated when the philosophy behind the specific legislative

enactments becomes clear to CEOs and union leaders.

"Thinking along the Right Lines": Creating Jobs through

Longer Workweeks and Later Retirement

The Hamilton Project of the Brookings Institution has issued a call for new and

innovative thinking about policies to create jobs. The following proposal is

submitted in response to the 2011 Hamilton Project Policy Innovation Prize

competition. It estimates employment and productivity gains, based on

respectable assumptions and Bureau of Labor Statistics data. It includes a

rigorous analysis of the resulting costs of job creation and the benefits of

increased productivity and is consistent with the Hamilton Project's economic

strategy of promoting economic growth, individual economic security and

effective public investment.

The key to innovation is not necessarily dreaming up some fantastic new

scheme that no one has thought of before. Sometimes, the most suitable "new

idea" rehabilitates and renews an overlooked idea from the past. One such full-

employment proposal was advanced at the end of the Second World War in the

South African Journal of Economics by William H. Hutt (1945).

Hutt's idea was based on principles many academics and policy-makers

endorse instinctively. Nevertheless, it has received remarkably little attention in

the literature. The principles upon which his proposal was based were as follows:

1. "Productive resources of all kinds, including labour, can be fully employed when the prices of the services they render are sufficiently low to enable the people’s existing purchasing power to absorb the full flow of the product."

2. "When the prices of productive service have been thus adjusted to permit full employment, the flow of purchasing power, in the form of wages and the return to property is maximised."

3. "The ideal monetary policy is one which has the least tendency to bring about price maladjustments of a kind which prompt resistance to the price changes necessary for full employment."

The specific legislative steps Hutt recommended on the basis of these

principles were "intended mainly to set industrialists and trade-union leaders

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thinking along the right lines." Hutt predicted it would take time for the

"philosophy behind the pronouncements" to become clear. His proposed

legislative measures included extending the traditional hours of work in all

occupations, delaying the retirement of older workers and encouraging women

who had entered employment during the war to remain on the job rather than

return to peacetime domestic roles.

These proposed measures were unconventional and frankly counter-intuitive.

As Hutt pointed out, "the Government policy so far announced is exactly the

reverse of what is here recommended." But, Hutt maintained, the problem with

conventional policy was that it was designed to keep wages at a high level while

reducing the output produced by each worker. Such objectives, he insisted, were

consistent with "the ancient and depression-causing 'lump of labour fallacy.'"

In current circumstances, measures consistent with Hutt's principles and

proposal could include doubling the number of H-1B work visas granted yearly,

raising the Social Security eligibility age to 70 years, reverting to the pre-1940

workweek standard of 44 hours and eliminating restrictions on employment of

minor children under the age of 14.

The precise impact of such policies when implemented would, of course,

depend to a large degree on take-up rates. For example, amendment of the Fair

Labour Standards Act would remove four hours a week from coverage by the

overtime provision of the act. But it is uncertain to what extent employers and

employees would take advantage of this potential lengthening of the workweek.

Productivity and employment estimates would thus have to rely on conjecture

about take up rates.

As mentioned earlier, the main objective of the legislative measures would be

to set the people thinking. Therefore, their direct quantitative impact might almost

be regarded as beside the point, so to speak. The full impact of the policies, then,

would rely on the voluntary actions of employers, employees and unions in

accordance with the guiding principles rather than merely the immediate results

of legislative enactments.

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Hutt squarely addressed potential objections to his proposals:

I can well imagine that many practical people would have been prompted to cry: "But this is completely fantastic. In our trade the cessation of work by one man certainly does mean an opportunity for another. If we sack one employee we have to engage someone else. When a member of our staff dies or retires, that means that someone from outside must come in either to fill the vacancy left by him, or that of some employee promoted."

However, as Hutt pointed out, "this objection states the very circumstances

which give rise to the illusion which I am attempting to expose." What may be

true from the perspective of a particular workplace or even a single industry

doesn't necessarily pertain to the economy as a whole. Hutt was adamant about

the nature of the erroneous assumption involved:

If we are to proceed on the assumption that the amount of work to be done is a fixed quantity, that is the only way to go about things. To share the work and share the wages must then be the principle. But, it need hardly be stressed, this is not only a wrong principle, it is a completely impracticable principle.

Before examining other potential objections to this job-creation idea and

presenting estimates of employment and productivity gains, it would be useful to

consider the extent to which Hutt's views reflect the established consensus of

economists. The "Theory of the Lump of Labour," which Mr. Hutt singled out as a

wrong and impractical principle and the cause of depression was given its name

by David F. Schloss in 1891. Since the 1890s, more than 500 unique citations of

the fallacy and its variants (lump of work, lump of output, fixed work-fund) can be

found in college textbooks, other books and journal articles. With remarkably few

exceptions, these citations repeat an assertion very similar to what Hamilton

Project Consulting Editor Timothy Taylor wrote in a 1997 column in the San

Jose Mercury News:

The illusion that shorter hours will reduce unemployment is based on what economists sometimes call the "lump of labor" fallacy. This is the belief that an economy needs only a certain fixed number of hours of labor, and the only way for new workers to get jobs is to take time from existing workers.

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The lump of labor argument is clearly wrong. As one obvious example, the U.S. economy has added 36 million new jobs in the last 20 years – 10 million of those in the last five years – without any offsetting reductions in hours worked.

Similarly, in a 1998 Brookings Institution commentary, Hamilton Project

Advisory Council Member Lawrence Katz criticized the "lump of output fallacy "

in which "most advocates of worksharing implicitly assume that output is held

constant in response to a policy effort to reduce hours per worker, so that total

hours of work to be done each week are unchanged."

If the lump-of-labor argument is so clearly wrong, if the illusion that shorter

hours will reduce unemployment is based on that argument and, furthermore, if

such an overwhelming consensus of economists assent to those first two

premises, what does that suggest about the feasibility of a strategy that relies on

the opposite assumption? At the very least, it warrants a closer look at a

contemporary version of Hutt's neglected proposal.

A similar perspective to Hutt's was advanced in 1936 by Harold Moulton,

then president of the Brookings Institution, in an article titled, "In Defense of the

Longer Work Week." Moulton argued that proposals for a shorter workweek were

based on two premises: first, "that America has now reached a stage of

development in which the labor supply is chronically in excess of requirements"

and second, "with shorter hours and no decrease in wages, aggregate pay rolls

would increase and the resulting expansion of purchasing power would stimulate

new production." Moulton disputed both of those premises, concluding:

If the underlying principle of shortening the working week in proportion to the increase in technological efficiency be adopted, it will mean that the laboring population is obliged to accept an increasing amount of leisure in lieu of an increasing volume of goods and services, which I believe they would prefer to have. It means cessation of the progress toward higher standards of living to which we have the right to aspire.

Lawrence Summers, Hamilton Project Advisory Council Member and former

Director of President Obama's National Economic Council would appear to

concur with Moulton's formulation in comments he made to a Washington Post

correspondent in 2009, "It may be desirable to have a given amount of work

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shared among more people. But that's not as desirable as expanding the total

amount of work (MacGillis 2009)."

In outlining his proposal, Hutt dealt with the practical objection that conditions

in any particular workplace or single industry may be perceived as contradicting

the macroeconomic implications of the central idea. He attributed such objections

to an "assumption that that the amount of work to be done is a fixed quantity,"

which he identified as the lump-of-labor fallacy. Are those objections in fact

attributable to such an assumption?

Although Schloss named the fallacy in 1891, its definition (using the exact

same words as Hutt: "that the amount of work to be done is a fixed quantity") first

appeared in an 1871 New York Times dispatch on the Engineers' strike in

Newcastle, England for the nine-hour day. Furthermore, the narrative associated

with that definition is found in an even earlier pamphlet, Character, Object and

Effects of Trades' Unions, published anonymously in 1834, which R.K. Webb

described as "the most celebrated and probably the most violent of the alarmist

publications" aimed at exposing the tyranny and outrages of trade unionism.

Sidney and Beatrice Webb's History of Trade Unionism noted the suspicion that

the pamphlet was commissioned and financed by the Whig government. The

pamphlet's author, Edward Carleton Tufnell, was an examiner for the 1833 Royal

Commission on the Employment of Children in Factories. The narrative that was

eventually to become enshrined as the lump-of-labor fallacy was clearly adapted

from testimony before that Royal Commission of Peter Ewart, a Manchester

cotton manufacturer. The key passage from Tufnell's pamphlet reads as follows:

The Union calculated, that had the Ten-hour Bill passed, and all the present factories worked one-sixth less time, one-sixth more mills would have been built to supply the deficient production. The effect of this, as they fancied, would have been to cause a fresh demand for workmen; and hence, those out of employ would have been prevented from draining the pockets of those now in work, which would render their wages really as well as nominally high. Here we have the secret source of nine-tenths of the clamour for the Ten-hour Factory Bill, and we assert, with the most unlimited confidence in the accuracy of our statement, that the advocacy of that Bill amongst the workmen, was neither more nor less than a trick to raise wages -- a trick, too, of the clumsiest description; since it is quite

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plain, that no legislative enactment, whether of ten or any other number of hours could possibly save it from signal failure.

Setting aside Tufnell's extreme antagonism – verging on demonization –

toward trade unionism, a notable feature of his pamphlet's analytical perspective

was its adherence to the logic of a rigid Wages-Fund doctrine, popularized from

classical political economy. That is to say the fallacy allegedly committed by the

workers and the union seeking a shorter working day consisted of their deviation

from the accepted doctrine. This deviationist critique persisted in fallacy claims

until 1868.

A funny thing happened in 1869, though. In that year, John Stuart Mill

recanted his allegiance to the Wages-Fund doctrine of Classical Political

Economy. By 1871, the ubiquitous fallacy allegedly committed by workers and

unions was no longer criticised as a deviation from the sacrosanct Wages-Fund

doctrine but as adherence to a view akin to the now-discredited doctrine. This

second-generation fallacy claim was eventually dubbed the "fixed Work-Fund" by

Alfred Marshall (1890). This is not to say that fallacy plaintiffs uniformly adopted

the new fashion. Simultaneous versions of the fallacy claim variously indicted

workers and unions for implicitly deviating from or adhering to an assumption that

they were presumably unaware of.

Pigou (1913) conceded the premise that workers and unions frequently

expressed a fixed Work-Fund perspective and described the view as fallacy of

composition. But, he cautioned, invalid reasons in support of a thesis do not

themselves prove the thesis wrong. It is yet another fallacy, ignoratio elenchi, to

presume that one has rebutted a conclusion simply by demonstrating the error of

particular arguments used in its support. Maurice Dobb's (1928) evaluation of the

fallacy claim was more sharply critical of the claim's substance:

…trade unionists in the nineteenth century were severely castigated by economists for adhering, it was alleged, to a vicious "Work Fund" fallacy, which held that there was a limited amount of work to go round and that workers could benefit themselves by restricting the amount of work they did. But the argument as it stands is incorrect. It is not aggregate earnings which are the measure of the benefit obtained by the worker, but his earnings in relation to the work he does — to his output of physical energy

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or his bodily wear and tear. Just as an employer is interested in his receipts compared with his outgoings, so the worker is presumably interested in what he gets compared with what he gives.

Now, all this fuss about reversible lumps of labor and fantastically fixed work

funds would be laughable were it not for the very real and persisting tragedy of

unemployment. So, setting aside the above objections, what would be the

magnitude of the potential employment and productivity gains from this proposal?

As mentioned earlier, it is not only the immediate employment and productivity

gains of the legislative measures that we are concerned with. Nevertheless,

those gains are the only results we can estimate. The eventual consequence of

"thinking along the right lines" is incalculable.

The take-up rate for longer hours would be uncertain. Therefore we must

make respectable assumptions regarding the effects of lengthening the standard

workweek. Increasing the retirement eligibility age may be slightly more tractable

in that estimates can be compared to recent trends that already show an

increase in the labor force participation of older workers.

A further complication intrudes after we have made all the estimates for the

additional hours supplied by current workers under the changed regulations. How

do those increased hours translate into increased (or decreased) output? To

make that estimate, it would perhaps be prudent to revert to what Lionel Robbins

formerly dismissed as "the naïve assumption that the connection between hours

and output is one of direct variation, that it is necessarily true that a lengthening

of the working day increases output and a curtailment diminishes it." Robbins

imagined in 1929 that "the days were gone" when it was necessary to combat

that assumption. Because those days are indeed gone, it has become

respectable to adopt the naïve assumption instead of combating it.1 Hutt, for one,

1 "Both classical and early neoclassical economists recognized that fatigue may not only

decrease the marginal product of an additional hour of labor but also, since it accumulates over

time, the long-run average product of a labor-day may decrease as the hours of work increase.

This simple fact, which was vindicated by an intense stream of academic research in the early

twentieth century (see, e.g., Florence, 1917; Vernon, 1921), has been for the most part ignored in

formal mathematical treatments of the labor market." – Nocetti (2008).

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certainly didn't buy the argument that the hours of work and output may vary in

opposite directions and his position is vindicated by standard practice in the

formal mathematical treatment of the labor market, which for the most part

ignores the research findings on fatigue and output from the early twentieth

century.2 In 1926, he wrote:

The effect of the Factory Acts upon production is a question which has not been squarely faced in modern treatises. There was obviously a sacrifice of productive power. This sacrifice can, no doubt, be shown to have been good, for social reasons, but the economic loss cannot be overlooked.

Some critics seem to imagine that when they have exploded Senior's "last hour theory" they have proved that no reduction of output followed shorter hours. We get vague theories about "the economy of short hours." Shorter hours were not obtained without sacrifice; they may be said to have been purchased by the workers in their acceptance of diminished wages, and by the community in lower productivity.

With his allusion to "vague theories about 'the economy of short hours,'" Hutt

demonstrated his blissful ignorance of Sydney Chapman's (1909) theory of the

hours of labour (which Robbins was referring to in his 1929 comment, cited

above), to say nothing of H.M. Vernon's wartime studies on the health and

efficiency of munitions workers or Philip Sargant Florence's investigation of the

economics of fatigue and unrest, which Robbins described as "an excellent

account of this matter." There is nothing in Hutt's 1945 proposal to indicate that

he subsequently changed his mind or was even aware of Chapman's once

highly-regarded theory.

Estimate of Jobs Created, Cost of Jobs and Productivity

Benefits

The following estimates of employment and productivity gains from extending

the hours of work, delaying retirement and expanding the annual quota of H-1B

2 "As observed in Nocetti (2008), the fact that fatigue affects performance was

already noted at the beginning of the 20th century by, among others, Chapman

(1909), Florence (1917), Marshall (1920) and Vernon (1921), but has been neglected

afterwards." – Dragone (2009).

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visas are based on two main assumptions: first, that output would expand in

proportion to the lengthening of the workweek and raising of the retirement age;

and second, that increasing the output produced by currently employed workers

will thereby create a demand for the potential output of those who are currently

unemployed. 3 This second assumption is in accordance with Say's Law – that

the supply of one sort of commodity constitutes the demand for another:

As each of us can only purchase the productions of others with his own productions—as the value we can buy is equal to the value we can produce, the more men can produce, the more they will purchase. Thence follows the other conclusion, which you refuse to admit; that if certain goods remain unsold, it is because other goods are not produced; and that it is production alone which opens markets to produce. – J. B. Say to T. Malthus.

A. Longer Hours: Table One presents the incidence of weekly hours worked

as reported in the Current Population Survey for December 2010. The total

number of workers who currently work between 40 and 48 hours per week is

67,848,000. Those workers work an average of 40.75 hours a week. Assuming a

take-up rate of 50% on an extension of the FLSA hours maximum to 44 hours for

those workers currently working between 40 and 48 hours a week would add

135.7 million hours weekly to the aggregate hours total, the equivalent of

3,174,000 jobs.

3 "It is easy to postulate a number of several equilibria provided one assumes conditions

enough; and Mr. Hutt, by selecting appropriate assumptions, is able to dogmatise about a number

of things with an efficient air." – Dobb (1931).

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Table OneWeekly hours '000s of workers1 to 4 hours 1,5595 to 14 hours 5,48815 to 29 hours 17,27230 to 34 hours 10,77835 to 39 hours 9,69540 hours 56,47841 to 48 hours 11,37049 to 59 hours 12,53060 hours and over 8,834Total 134,004Average hours 38.2Full-time average hours 42.2

B. Later Retirement: The projected population between the ages of 65 and 74

for 2011 is 23,489,000. The projected workforce participation rate for that age

group is 25.8 percent. Assuming that postponing the Social Security eligibility

age to 70 years will raise the participation rate to 30 percent would retain an

additional 990,000 workers in the workforce.

C. More Work Visas: H-1B work visas were capped for 2011 at 85,000.

Doubling this cap would result in an additional 85,000 employed workers. The

total estimate of employment gains would thus be as follows: 3,174,000 +

990,000 + 85,000 = 4,249,000. It is expected that it will take approximately two

years from implementation of the policies for the resulting adjustments to fully

work themselves through the system.

Following from the assumption that output would increase in proportion to

hours worked, the contribution of these additional 4,249,000 workers plus the

equivalent extra years or hours worked by currently employed workers would

increase GDP by a total of 6.3 percent.

The financial cost of extending the standard workweek would be minimal and

might even entail a cost reduction with regard to enforcement, as would removing

restrictions on child labor. Similarly, extending the retirement age would result in

cost savings rather than expenditures. Expanding H-1B work visas would be cost

neutral. Although there may be health, environmental and social consequences

to the changes, these can be disregarded as economically insignificant

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externalities.4 Based on the 2010 fourth quarter estimate of GDP of $14,861

billion, a 6.3 percent increase in GDP, as estimated here, would confer a benefit

of $936 billion.5

The above policy proposal encourages expanded work effort by currently

employed individuals as a method for creating additional wealth that will

consequently employ more people. The proposed legislative measures have the

potential of substantially adding to growth and employment, given the

assumptions adopted by Hutt and widely shared by economists and policy

makers. Furthermore, they are in accord with the economic strategy and

philosophy of the Brookings Institution and the Hamilton Project. Success of the

legislative measures could potentially lead to broad voluntary adoption of even

longer hours and later retirement once industrialists and trade union leaders

begin "thinking along the right lines."

4 “The human toll here looks to be much worse than the economic toll and we can be grateful

for that.” – Larry Kudlow, CNBC, commenting on the March 11 Japanese earthquake and

tsunami.

5 Although sceptics may question the rigor of the cost and benefit analysis presented here,

any discrepancies pale beside Simon Kuznets's (1947) criticism of the "double-counting" inherent

in the Commerce Department's National Income and Product Accounts estimates. Furthermore,

following Cole and Ohanian (2000), "several of the model parameters have values that are

standard in the business cycle literature" and Ohanian (2009), "this treatment is also

reasonable because there is evidence that worksharing that reduces the number of

days an employee works, even keeping the length of the workweek fixed, also

reduces output per hour…" the meaning of "reasonable" can considered equivalent

to conventional or conforming to habitual usage.

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