Shorter Weeks, Longer Vacations

The United States is suffering the enduring effects of a collapsed housing bubble, not a financial crisis. This is an important distinction, because it points to the necessity of relying on shorter workweeks and longer vacations to return to full employment.

The financial crisis is largely irrelevant to the economy’s current weakness. The problem is that the demand that was created by $8 trillion in housing bubble wealth cannot be easily replaced. The bubbles generated more than $600 billion in annual demand in construction that has now been lost. The imaginary equity created by bubble-inflated house prices led to a consumption boom that pushed the saving rate to zero. Now that this wealth has vanished, so has the consumption that it fueled.
This leaves a gap of more than $1.2 trillion in annual demand. In the short term, this can be filled only by government deficits. In the longer term, the demand gap will have to be filled by a reduction in the U.S. trade deficit, but this requires a large fall in the value of the dollar.

With neither the prospect of much larger deficits nor a sharp decline in the value of the dollar very likely in the near future, the only remaining option is to share the work. This could be accomplished by changing employers’ incentives so that it is more profitable to reduce work hours than to lay people off.

Every month, companies lay off or fire two million workers. If firms could be persuaded to keep just 10 percent of these workers employed working fewer hours, it would be equivalent to creating 200,000 jobs a month.

If unemployment insurance benefits were used to subsidize short workweeks, so that people were compensated for part of their lost time (e.g. a worker who puts in 20 percent fewer hours gets 10 percent less pay), then many firms might opt to go the route of shortening work hours. This policy has been so successful in Germany that its unemployment rate has actually fallen since the start of the downturn, even though its growth has been no better than growth in the U.S.

Policy can also promote longer vacations, family and parental leave, and paid sick days — all mechanisms for making the workplace more family friendly. There seems to be no way to avoid the fact that we are destined to have a prolonged period in which the economy is operating below its potential output. It makes much more sense to turn this into leisure that can be enjoyed by everyone, rather than unemployment that is suffered by an unlucky minority of the work force.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

This article originally appeared on Room for Debate.

Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC.