Another tempting policy to increase employment is to limit the number of hours an employee can work. Suppose that a firm needs 1,200 hours of labor time a week. If a typical worker works 40 hours per week, then the firm will need to hire 30 workers. But if the government were to legislate a 30-hour workweek, then the firm would need to hire 40 workers instead.
This idea of “spreading work” through restrictions on hours was part of the response in the United States to the Great Depression. During the early 1930s, the US government instituted such restrictions under the heading of the “National Economic Recovery Act.” The idea persists to the present day. In France, the government passed a law limiting hours worked to 35 hours per week (for workers at large firms) starting in the year 2000. In Germany, the government operates a policy called Kurzarbeit, whereby it subsidizes firms who retain workers for shorter hours in times of recession.
One problem with such policies is that restrictions on hours reduce the value of a match between a worker and a firm. Consequently, fewer matches will be formed, and more workers will be unemployed. Another problem is that it reduces flexibility in the labor market, which leads to less efficient functioning of the economy.
As a concrete example, consider auto manufacturers in the years following the Great Depression in the United States. This industry had substantial variations in hours worked over the model year. During times of high demand for cars (the spring), factories and their workers were working overtime to meet the increased demand. Restrictions on hours meant that overtime working had to be replaced by increased hiring. Firms that wanted to produce more output had to hire and train new workers. This was costly, so firms sometimes found it was better simply to accept that they would not meet the high demand.
In the case of France’s 35-hour workweek, matters were a bit more complicated. The mandated short workweek imposed some rigidity on firms. However, during the negotiations for this change in the laws, French labor unions agreed to some other changes that improved the flexibility of the labor market. France later moved away from the 35-hour workweek by permitting firms and workers to agree to longer work hours if they wish.
KEY TAKEAWAY
Most governments provide workers with unemployment insurance. In many countries, governments also impose costs on firms that fire workers and also restrict hours worked.
One rationale for intervention by governments is to provide insurance to workers that is not available in private markets. Governments also take action in an attempt to increase employment rates.
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Checking Your Understanding
Can a firm in the United States fire a worker without permission of the government?
What was one of the arguments in France for restricting the hours worked per week?
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