The trade-off between workers and hours

According to standard labour economics, a company chooses how to combine factors of production depending on the relative prices in the long-run.¹ In the short-run, the firm’s capital stock, such as machines and buildings, is fixed and it only chooses how much labour to employ at a given wage rate. The decision is complicated by the fact that labour consists of two components: the number of workers and the amount of time each worker is employed.² In a downturn the

1 Borjas 1996, p 105; Björklund et al 2000.

2 Borjas 1996, pp 102, 144.

employer can thus choose whether to reduce the total amount of labour by reducing the number of workers or by reducing the number of hours, or a combination of both. Perfect substitutability between workers and hours is often assumed in simple models, which means that the same output can be attained with three workers employed eight hours per day as with one worker employed 24 hours per day. This is unrealistic of course. In practice an employer has to consider several factors when determining working hours and manning. One such factor, apparent in the example above, is fatigue. Workers get tired after a while and cannot maintain the same productivity level. They also find it inconvenient to work at certain times during the day and will demand compensation.

A basic idea underlying the whole discussion about hours-reductions is that there is a normal amount of working hours over a particular period of time. This idea may be in the form of an implicit understanding or it may be formalized into agreements or legislation. When there is a normal working day (or week), there may also be rules regarding the criteria for reducing or increasing the number of hours worked. Such rules affect the employers’ scope for action.

Overtime work is likely to be common in upturns if employers can command the workers to work more hours per week without having to pay high wage additions. If that is the case, the employer can, furthermore, easily reduce labour inputs in downturns by returning to the normal working week. If it is expensive to extend the working week a greater part of the adjustment of labour inputs will be made by changing the number of workers.

In Sweden the 48 hour week was, as mentioned, introduced in 1920. Before that, weekly working hours had been stipulated in collective agreements and differed between industries and companies. No systematic study has been made of the size of wage additions for overtime work in various parts of the labour market, but it may be established that collective agreements in nine out of ten cases included rules about overtime pay.³ Some agreements restricted the employers’ possibilities of commanding workers to do overtime whereas others restricted the workers’ rights to refuse overtime.

Another factor of importance for the trade-off between workers and hours, which has been analyzed by Walter Oi, is the notion of labour as a quasi-fixed factor of production.⁴ Oi reasons that some of the costs of employing workers

3 Kollektivavtal angående arbets- och löneförhållanden i Sverige, III: Arbetstidens längd och arbetslönens storlek inom olika näringsgrenar enligt källande kollektivavtal (1907/08) 1911, pp 195-200.

4 Oi 1962.

are fixed, independent of the number of working hours. The employer may, for example, incur costs for advertising, for screening and selecting job applicants and training new recruits. Administering wage payments is another item that is likely to be unrelated to the length of the working week. If the fixed costs are high, employers will prefer to make as few changes as possible in the number of workers employed over the business cycle. The workers will be offered more hours in good times and fewer hours in bad times. It is often assumed that fixed costs are positively related to the skill level of the workers.⁵ Empirically it has been observed that employers are reluctant to lay off skilled workers in downturns and implement short-time working instead.⁶ Hours-reductions were without doubt used as an adjustment mechanism on the Swedish labour market before World War II, but we do not know much about how important it was in different industries or if there were changes over time.⁷

From the existence of fixed labour costs it follows that the trade-off between workers and hours is related to expectations of the future need for labour. If a downturn is regarded as temporary and if demand on the product market is expected to resume in the foreseeable future, employers will be less inclined to reduce the number of workers in view of the fixed costs related to recruitment and training of new workers. If a downturn is considered permanent, the same fixed costs will induce a reduction of the workforce. Having a huge number of workers working fewer hours is, in the long-run, usually more

5 See for example Rosen 1968.

6 This phenomenon is often called ‘labour hoarding’. To reduce the number of working hours is, however, not the only way for an employer to hoard labour. Other options may be to produce for stock or to transfer skilled workers to unskilled jobs. For evidence of labour hoarding from nineteenth century Sweden, see Berggren 1991, pp 186-187, 205-206, 240.

7 Arbetslöshetsutredningens betänkande I. Arbetslöshetens omfattning, karaktär och orsaker. Avgivet av 1926 års arbetslöshetssakkunniga 1931, p 83. In some industries there were collective agreements stipulating hours-reductions in temporary downturns. Lundh 1988; Bengtsson 2006. Bengtsson (2006, p 114) also states that work-sharing, “in the form of daily reduction of working-time or shift-wise temporary layoffs”, were “not seldom” implemented in the absence of formal agreements. The historical development of working hours in Sweden has been described and analyzed by several researchers. With the exception of an inquiry into the seasonal variation of working hours published by the National Board of Trade in 1911 (Arbetstidens längd inom industri och handtverk i Sverige), the focus has been on the normal working hours according to collective agreements and laws; not on the actual time spent at work and its short-run variations. Johansson 1977; Johansson, Alf 1988, pp 144-167; Isidorsson 2001. Isidorsson (2001) discusses short hours as an adjustment mechanism, but empirically his treatment of this matter is limited to modern-day conditions.

expensive than having a smaller number of workers working many hours.

Workers that quit voluntarily retire, or disappear for some other reason, must be replaced. The employer must have larger facilities than otherwise needed or to impose shift-work, which may require wage amendments and imply costs when work-shifts begin and end.

The adjustment of the labour inputs may be thought of as a dynamic process where the employer reduces the length of the working week in an initial stage of a downturn in the business cycle.⁸ If the recession seems to be lasting, the employer will have a stronger incentive to reduce the number of workers.

Initially, this may be accomplished by attrition. When such alternatives are exhausted, layoffs follow. This pattern is not only observed by modern day labour economists but was also seen by the National Board of Health and Welfare in its surveys of the labour demand during the 1921 crisis.⁹ A majority (53 percent) of the participating companies had, to some extent, reduced working hours during the first quarter of 1921. Thereafter hours-reductions became less common.

Most empirical studies on the trade-off between workers and hours have been conducted on industry level.¹⁰ One of the few studies on individual firms shows that the costs associated with different courses of action in adjusting the composition of the labour inputs may be related to previous experiences.¹¹ In fact, hours-reductions can be viewed as a kind of organizational change that causes increased costs for coordination and rearranging work schedules. These changes may be difficult to carry out the first time but easier to implement when there are established routines and experiences in the company.

So far, the discussion has been focused on how the employer may regard the trade-off between workers and hours. However, this distinction is also important for the workers. They may have strong opinions about how a company should respond to shortage of work. For them it is ultimately a matter of having a job or not. A study by James Medoff of the US manufacturing sector in the decades after World War II has indicated that layoffs, in relation to other adjustment mechanisms, are more important in companies with strong unions.¹²

8 Björklund et al 2000, pp 98-99.

9 Arbetslöshetsutredningens betänkande I. Arbetslöshetens omfattning, karaktär och orsaker. Avgivet av 1926 års arbetslöshetssakkunniga 1931, p 83.

10 For examples of historical studies in this field see: Bernanke 1986; Carter & Sutch 1998; James 1998; Bowden et al 2006.

11 Huberman 1997, p 411.

12 Medoff 1979, p 393.

One explanation for this pattern is that collective bargaining is characterized by the preferences of the average union member – who is likely to be a senior worker. In non-union settings, on the other hand, the management is more likely to be influenced by the behaviour of marginal workers – who are more likely to be less experienced. Given that senior workers have a stronger employment protection, they will prefer an adjustment policy that involves layoffs but keeps hours and incomes stable. It should be said that Medoff’s study does not distinguish between temporary and permanent layoffs and that it is based on data from a rather short period. There is not enough evidence to say that unions in general oppose short hours. From a theoretical perspective one could also expect the opposite of what is seen in Medoff’s data; that hours-reductions are more important in contexts where a major part of the workforce is organized than where the union density is low, since unions have weak incentives to try to protect the employment of non-members. This argument is supported by the observation that American unions in the first half of the twentieth century often advocated hours-reductions.¹³

There were different opinions about adjusting the working hours in recessions in Swedish labour movement of the inter-war era. Some unions wanted to avoid workforce reductions and regarded hours-reductions as a better way of dealing with shortage of work. There could also be diverging opinions between fractions within the same union.¹⁴ Berit Bengtsson attributes the differing opinions about hours-reductions to differences in the nature of labour demand and the characteristics of the unions.¹⁵ Workers had a more positive attitude towards temporary hours-reductions in branches with a high degree of seasonality in labour demand and where they were organized by craft.¹⁶ In such circumstances cutting working hours could reduce competition and under-bidding for vacancies. At the same time, the workers were given a period of recovery after more intense work during the peak season. Besides seasonality, one may come up with several other hypotheses about what affects the workers opinions about hours-reductions.

13 Slichter et al 1960, p 152.

14 For an example, see Eriksson 1991b, pp 230-232.

15 Bengtsson 2006, p 114.

16 Collective agreements that stipulated hours-reductions were found in collective agreements from the 1930s for tin-plate and sheet-metal workers, saddlers, founders and upholsterers. Stipulations about hours-reductions were less common in agreements made by unions organized according to industry, but exceptions were found in some agreements of unskilled labourers and metal workers. Bengtsson 2006, p 114.

The wage level and gender composition of the workforce are two aspects to consider in this regard. Hours-reductions are more likely where there is a certain margin to the subsistence level, otherwise workers will not be able to survive if hours are reduced. Hours-reductions are also more likely where a huge share of the workers is women, particularly in historical settings where women’s incomes were seen as complementing the male breadwinner’s. Workers incomes are not only related to wages and working times, but also to the existence of unemployment insurances. The design of such schemes may be of great importance for workers’ attitudes towards reducing working hours temporarily.

An insurance where part-time unemployed are eligible to benefits will increase the income security of the workers and reduce the negative consequences of hours-reductions. Those who advocate short hours can thus try to convince politicians to impose a public unemployment insurance which acknowledges part-time unemployment or create a private fund based on that principle. In Sweden there was, as mentioned, no public unemployment insurance until 1935 but there were several private schemes run by unions. Most of these schemes did not hand out benefits to part-time unemployed.¹⁷

To conclude, the trade-off between workers and hours is, although often neglected, an important aspect of how employers and workers respond to shortage of work. The existence of fixed labour costs may induce employers to implement hours-reductions in temporary crises, but make them more sceptical towards the same measure as a way of dealing with long-term changes. Unions, on the other hand, may differ in their opinions about hours-reductions, for example, depending on whether the industry is characterized by seasonality, how many workers are organized, wage level and so forth. In the following section we take a closer look at working hours in the Swedish tobacco industry.