Monday, August 22, 2005

Who needs working-hours regulations?

Perhaps the bits of Euro-legislation most derided by experts in the English speaking world are those concerning working-hours restrictions. The standard argument against such legislation is based on liberal economic principles and really does sound pretty good. It goes like this: why not let individuals decide for themselves how much they want to work, and stop interfering in their free choice? According to this view, the best course of action is to minimize regulations, and simply let market mechanisms deal with the whole issue of working hours.

This sounds very convincing, but a serious problem arises from the nature of choice in employment. Let’s digress very briefly to look at choice in a more canonical market. Suppose I choose to buy 100 grams of coffee beans at a supermarket. The fact of my purchase is a reasonable indicator that I wanted 100gms, and not 90, or 110, provided the vendor sells beans by the gram. (Even if she doesn’t, if she has a large number of competitors, in the absence of any kind of collusion, someone in the same town should offer the choice I want.) Now, if we assume that I myself am the best person to judge what makes me happy, we can treat my buying behaviour as information that reveals the amount of beans I really want.

Unfortunately, choosing the number of hours you work is nothing like choosing the number of grams of coffee beans you want to buy. There are at least two major differences. The first is that except for a few professions, you can’t just decide on your own how much you want to work. Work is mostly a team effort, so everyone needs to be there at the same time for the organization to function effectively. As a consequence, you can’t just unilaterally decide to work fewer hours (or more) and necessarily be able to do it.

The second and maybe more important difference is that there are typically only a very small number of organizations in a given area that can effectively use a given worker’s skills. There is, in any practical sense, limited competition for labour, and a limited choice of employment options available to most workers. This departure from the continuum of choice we face when buying coffee beans can lead to strange market outcomes. Here’s one example. Suppose all the workers at a car factory really want to work 40 hours rather than 45, such that in every sense their well-being is better served by working fewer hours. Suppose also that there is no union, and that management present the option of a 45 hr week or no job to each worker individually. If there is no other car factory in the area, or at least none offering a 40hr week, the choices facing workers look like this: a) Accept 45hrs, b) Quit (and move your entire family in search of another job with exactly the right number of hours... bearing in mind that this ideal job, if at all it exists, may be 1000 miles away from all your friends and your elderly mom!). So rationally enough he chooses a). But this free choice has delivered a weird result: labour has chosen an outcome that is suboptimal for all of them! The outcome is the best of the very limited options available, but the 40hr week outcome which everyone would have preferred is just not on the table.

Employees simply do not get a realistic continuum of working hours at a given job they’re trained to do, in the exact same location. If they did (some workers probably do, work-from-home translators maybe?) we could treat the number of hours actually worked as a meaningful "revealed preference". But in real life employment choices are very, very limited. The real choice would be more like: work x hours a week at something you're trained to do, or <x hours on something totally different, or be unemployed. Given these choices, even someone who wants <x, usually just puts up with it.

We could reasonably view this problem as a sort of market failure in the provision of leisure time. It then becomes easier to see why some sort of intervention may be necessary to ensure outcomes that are closer to optimal. Such interventions may be through trade unions, regulation, or some other means. I’m not sure if the Euro approach is the right one, but the question of working hours does seem to be one that cannot be solved simply by leaving things to the magic of the market.

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