[PEN-L:11532] Clone of Owen

[knowware@xxxxxxxx (Tom Walker)]

Back in June, I introduced Pen-l to the ruminations of John D. Owen about
the dire consequences of shortening the workweek (Re: French elections
Retitled: Limit the Working Day?, 6/6/97). It turns out that an economist
with the Cleveland Federal Reserve Bank, Terry Fitzgerald, has been
recycling this slippery dreck (without attribution) in the Cleveland Fed's
_Economic Commentary_(<a
href="http://www.clev.frb.org/research/com/090196.htm";> "Reducing Working
Hours: American Workers' Salvation?" </a>).

Here's Terry Fitzgerald's version of the "shorter is longer" paradox:

"As an example of the potential difficulty in predicting a policy's effects,
consider one of the provisions of the Full Employment Act: amending the FLSA
by decreasing the standard workweek (after which firms must pay an overtime
premium) from 40 hours to 30 hours. The intent of this provision, in
conjunction with other provisions of the bill, was to encourage firms to
hire additional workers and decrease the number of hours per worker.

"Let's examine the possible effects of reducing standard hours using a
simple example. Suppose a firm can hire workers for $10 an hour up to 40
hours, then must pay $15 an hour for any additional time on the job.
Furthermore, assume that the firm must pay $190 in fixed costs per worker
(these costs may include fringe benefits, and hiring and training expenses).
For simplicity, the firm can choose among three options, each of which leads
to the same total employee hours (400) and the same output:

        1. Employ 12 workers for 3-31/3 hr.
        2. Employ 10 workers for 40 hr.
        3. Employ 8 workers for 50 hr.

"The cost of each of these options (cost per worker x number of workers) is

        1. $523.33 x 12 = $6,279.96
        2. $590.00 x 10 = $5,900
        3. $740.00 x 8    = $5,920.4

"Clearly the firm will choose option 2 and employ 10 workers.

"Now consider lowering standard hours from 40 to 30 and assume that the base
wage rate and fixed costs remain unchanged. The cost of the three options
becomes

        1. $540.00 x 12  =  $6,480
        2. $640.00 x 10  =  $6,400
        3. $790.00 x 8   =  $6,320.5

"The firm will now choose to employ eight workers for 50 hours rather than
10 workers for 40 hours. Thus, reducing standard hours leads to an increase
in hours per worker and a decrease in employment, exactly the opposite
effect of what was intended."

In June, I offered a $50 prize to the first person who could solve Owen's
paradox. The prize went unclaimed. I'll try again. This time I'll offer a
$10 prize (Canadian) to the first person who bothers to go back in the Pen-l
archives, look at my solution to the riddle and restate it in their own
words (this is an experiment in maximizing behavior).

Fitzgerald has also written an article in the most recent Federal Reserve
journal, with a similar title <a
href="http://www.clev.frb.org/research/review/1996q4.htm";> "Reducing Working
Hours"</a>. The article was described to me by a Business Council research
director as "a good example of the type of analysis one would expect from an
economist." I think he meant it as a compliment.

Actually, the new article is a tautological gem -- I mean that sincerely.
Fitzgerald takes pains to point out each of the many constraining
assumptions he makes. The careful reader will learn from Fitzgerald's
painstaking demonstration that, all other things being equal, 12.5 = 12.5
(see Table 7, column 1). I believe that this is what's called the "identity
principle" in mathematics.


Regards,

Tom Walker
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