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Dean Baker: Shorterning the American workweek would stimulate the economy

Guardian Economics 26th January 2009

It is important that some version of President Barack Obama's stimulus package gets approved by Congress as quickly as possible. The package will be an important first step toward stopping the downward slide of the economy.

However, the package is only a first step. As Obama's own economic team's analysis showed, the package would still leave us with 7% unemployment two years from now (roughly the current rate), even if things go relatively well. And it is easy to imagine scenarios that are worse than the baseline assumed in this analysis – for example, a collapse of the banking system due to a tidal wave of bad debt or a run on the dollar resulting from our chronic trade deficit. In short, we should be constructing plans to boost the economy that go beyond this stimulus package.

I have already written about one possibility: health insurance. The government can quickly provide a boost to demand by awarding generous tax breaks to employers for covering workers who do not already have insurance and for making current policies more generous. These tax breaks can be coupled with the opening of Medicare to anyone who wants to buy in, thereby getting a jump start on Obama's health insurance programme.

The other obvious way to provide a quick boost to the economy is by giving employers tax incentives for shortening their standard workweek or work year. This can take different forms. An employer who currently provides no paid vacation can offer all her workers three weeks a year of paid vacation, approximately a 6% reduction in work time.

Alternatively, employers may cut the standard workweek, say from 40 hours to 36 hours, a 10% reduction in work hours. Employers could also adopt policies such as offering workers paid sick leave. If this averaged five days a year, this would come to a reduction in hours of 2%. They could even offer paid parental leave.

These policies would bring the US in line with the rest of the world. In other wealthy countries, paid vacation time is standard, with the average being close to five weeks a year. Similarly, the US is the only wealthy country that does not require employers to give workers paid time off for parenting or to provide paid sick days.

The government could give employers an incentive to provide paid time off now by giving tax breaks to cover all or most of the paid time off. For example, if firms gave workers three additional weeks of paid vacation a year, the government could offer to provide a tax break for two years that would cover this cost up to $2,500 per worker for the two years covered by the stimulus package. This sum would be sufficient to fully cover three weeks of vacation for workers earning less than $40,000 a year, which would be most workers in the economy.

This is a neat form of stimulus because it directly gives employers an incentive to hire more workers, as can be easily shown. Suppose employers of 50 million workers take advantage of this deal, cutting their workers' time by an average of 6% as discussed in this example. These 50 million workers will have exactly as much money to spend as they did previously, so presumably their consumption will not be affected.

However, the employer will now be getting 6% less work performed because everyone is only working 49 weeks a year rather than 52 weeks. Since demand for the companies' products will not have changed, and the companies' labour costs have not changed (the additional cost was picked up by the government), they will presumably want to hire roughly 6% more workers to make up for the lost hours.

If employers of 50 million workers took up the deal, then this 6% would translate into three million jobs. This would be a very good start for getting the economy back toward full employment.

There are of course many other benefits that workers could get by working fewer hours. They would have more time to spend with their children or pursuing hobbies and other non-work activities. In a country where many couples rarely see each other because they alternate work schedules to allow for childcare, some additional free time could have enormous value. Arguably, it would even be beneficial for the environment.

Of course, the plan is that the tax credits just run for two years or long enough to help the economy get back on its feet. After the tax credits end, companies may go back to their current practices, but it is also possible that workers will value a shorter work schedule so much that the practice is left in place. Let's hope that we have the chance to find out.

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