[PEN-L:1204] the quasi-fixed factor fallacy

[knowware@xxxxxxxx (Tom Walker)]

The standard argument against redistributing the hours of work to reduce
unemployment involves reference to a "lump-of-labour fallacy" (of which much
more later) and a brief demonstration of how the presence of hiring and
training costs, which vary with the number of workers, would make such a
proposal unviable. It would increase total labour costs and thereby reduce
the demand for labour.

Although Oi stated that the theme of his paper came from J.M. Clark's
analysis of the overhead costs of labour, he ignored Clark's central
argument that any accounting for labour costs had to include the social
costs. If those social costs are accounted for, the results of a
redistribution of work time to create employment are the opposite of the
usual treatment: the cost of labour falls at the same time as the hourly
wage increases (for the simple reason that transfers to unemployed workers
are eliminated).

Walter Oi in "Labor as a Quasi-fixed Factor" (JPE 1962) p.554:

"The central theme of this paper has been the treatment of labor as a
quasi-fixed factor. This concept of labor was suggested by J.M. Clark, who
dealt primarily with the social costs of unemployment."

J.M. Clark in "Studies in the Economics of Overhead Costs" p. 402:

"If all industry were integrated and owned by workers, what would be the
relation of constant to variable expense? Labor would then be in the
position which capital now holds, and while the need of incentives to call
forth extra effort or to compensate for long hours might make some wage
system necessary, it would be clear to the worker-owners that the real cost
of labor could not be materially reduced by unemployment. . .

"This imaginary integration of all industry has something more than a mere
ficticious existence. It represents the underlying facts about the actual
industrial organism, which is an integrated whole, whether its formal
organization is cast in that mold or not."

Here's a simple demonstration of what happens when the accounting for social
overhead costs is restored to the quasi-fixed factor analysis:

Assume that the per worker costs of hiring and training are $125 per week
and the hourly wage is $10 per hour for a 40 hour week.

Assume that the cost of maintaining an unemployed worker and dependents "in
good stead" (that is healthy, happy and job ready) is one-half the weekly
wage, or $200 per week.

Then the total labour cost with 90 employed workers and 1% unemployed is
$49,250. However, by reducing the hours of work to 36 and redistributing
those hours one-for-one to create 10 new jobs, the total labour cost is
REDUCED to $48,500

The lower cost result is true for all cases in which the cost of hiring and
training is less than the cost of maintaining an unemployed worker. The
above "pure case" assumes perfect substitutability of workers for hours, in
other words, neither an increase nor a decrease in productivity. Removing
those assumptions doesn't change the outcome.

If we assume instead that the unemployed possess a lower level of skill and
hence will lower productivity, that can be adjusted for by a differential
entry level wage. If we assume that the shortening of work hours will take
up some slack in production, then that will reduce the labour cost even
further and hence increase the demand for labour or it will increase wages
with the same effect.

The only remaining objection is that the redistribution of work time to
eliminate unemployment would give workers greater power in labour relations.
Of course, that has been the only REAL objection all along.






Regards,

Tom Walker
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
#408 1035 Pacific St.
Vancouver, B.C.
V6E 4G7
knowware@xxxxxxxx
(604) 669-3286
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
The TimeWork Web: http://www.vcn.bc.ca/timework/