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Do flexible working hours stabilize unemployment fluctuations?

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Source: anyaberkut

During the global financial crisis, highly uneven labour market developments in European countries revived the debate on the role of labour market institutions in stabilizing the economy. In particular, the apparent success of Germany in using short-time work schemes attracted the high interest of policymakers and economists, who hoped that by promoting working-time flexibility (i.e. the degree to which firms and workers can freely set the number of working hours) one can save jobs during downturns.

A recent article in the European Economic Review by Marcin Kolasa (SGH Warsaw School of Economics), Michał Rubaszek (SGH Warsaw School of Economics) and Małgorzata Walerych (Narodowy Bank Polski) adds to the debate on the impact of working-time flexibility on unemployment fluctuations. The authors propose a structural macroeconomic model of the euro area, where workers face a risk of being laid off, in which case they have to search for a new job. Next, they conduct a series of counterfactual simulations to compare the behaviour of the European economy in flexible and rigid working-time scenarios.

The key finding of the paper is that higher working time flexibility in the euro area would amplify rather than dampen unemployment fluctuations. This claim, which is in opposition to the conventional view, is related to the observation that hours per worker in many European economies move independently (i.e. acyclically) or even opposite (i.e. countercyclically) to the overall level of economic activity. As average working time tends to move in the opposite direction to changes in demand for labour services, its movements typically require stronger adjustments in employment. 

Why do hours per worker move countercyclically in Europe? According to the proposed model, two mechanisms are at play. First, when firms increase layoffs during a recession, they start by firing the least productive workers, whose working time is usually shorter. Moreover, those who stay employed want to work harder because, during recessions, the perceived value of income is higher and losing a job is relatively costly.

It should be added that the presented results are more relevant in the European than American context. The reason is that hours per worker in the US move strongly with the overall level of economic activity, which can be traced back to the stabilizing role of worker-initiated job termination (quits). It also needs to be stressed that the focus of the paper is on the effects of hours flexibility as such, which should not be confused with short-time work schemes subsidized by the government. Nevertheless, the article delivers a clear message that constraining the adjustments of the average working time, especially overtime working, may limit rather than amplify fluctuations in employment.

Author(s) of the original publication
Marcin Kolasa, Michał Rubaszek and Małgorzata Walerych