Sunday, 28 February 2010

Pain without the gain?

   Few would disagree that Portugal has to undergo some sort of internal devaluation process. Wages are an obvious place to start. The real question is how much should wages be lowered in nominal terms. A couple of weeks ago I suggested that in order to smooth this process which will be unavoidably painful maybe we should think about raising the 40-hour working week legal duration. Perhaps the reduction of nominal wages could be lessened if the number of hours worked in the economy rose. Say, if we had a 45 or 50-hour workweek.
   At the time, Tiago Mendes, a Portuguese economist based at Oxford University, commented that this
suggestion probably would not produce the intended effects. He said that, first, this measure would clash with the simple fact of Portugal's low and stagnant productivity. Second, he added, it is only a tiny percentage of the working force which is bound by that legal limit. In practice, Tiago argues, Portuguese workers already work more than 40 hours per week.
   Tiago is surely right on the first score. But I suspect that he is not on the second. I don't have any hard data on this question (maybe someone out there could provide them?), but a lot of private firms (both national and foreign-owned) abide strictly by this legal rule. And we should not forget that civil servants, of course, do also.
   Another question could be raised, though. Since unemployment is still growing fast, and output growth is flat, one should expect that the total hours worked in the economy will fall. This creates a problem. For even if average nominal wages fell that could leave the most important indicator, labour costs per hour worked, unchanged. We would have the pain without the gain.


  1. Statistics capture official hours worked.
    For a small sample of manufacturing firms I have the informal observation that declared and actual hours worked do differ (I wonder whether this is independent of how social contributions are computed...)

  2. As Luis pointed out in the other post, the "facts" are only facts to the extent that they are "reported facts". I agree with Miguel that it would be interesting to estimate the proportion of workers in the economy where one can assume that the legal constraint is binding. I would be inclined to include industry and some services in the private sector, but would be cautious about including the civil servants, for issues of productivity and morale. The main point of the short comment I left in Cachimbo is that I believe increasing the hours would be less effective in Portugal than in other countries, and less effective than a cut in the nominal wages, due to issues of morale, work ethics and productivity. Take the civil servants, for instance. Nearly eveyrone agrees that the state is too big and productivity too low - increasing the number of hours of work for those already quite improductive would only increase frustration and could even dampen the productivity even more.

    In essence, the relevant thing is to find sectors where the there is a binding constraint on the productivity - and not so much on the number of hours of work. A small cut in the nominal wages would in my opinion be preferable, also because of the added effect of "waking up" people to the significance of the crises we are and will stay in for a while, which further increases the accountability of the political leaders, in a somewhat more virtuous cycle than the one we-ve been living for the past decade or so.