A four day week must withstand the productivity test to be worth the gamble

Durham based challenger bank Atom has announced a four day working week for all of its 430 employees as more and more people debate the number of days we should be working.

For SMEs in the services sector, a four day week is an attractive bandwagon to jump on.

It is commonly given credit for making existing staff happier and making it easier for businesses to attract new talent in a competitive market.

We should not take too seriously the survey carried out by the Sun newspaper a month ago on the question “Should the 4 day week become the norm?”. A massive 93.4 per cent ticked the “definitely, yes” box. Respondents were not told whether this involved extra hours on the days actually worked and/or a reduction in pay.

But over long periods of time, the workforce does appear capable of making rational decisions on the trade-off between income and leisure.

Angus Maddison was a distinguished economist who devoted his efforts over several decades to constructing a very long time series of data for countries across the world, such as “The World Economy: a Millennial Perspective”, published by the OECD in 2001. In it, Maddison produced estimates of real income per head as well as the total annual hours worked on average by an employee.

By the second half of the 19th century, almost all Western countries had become industrialised. Maddison published data for a wide range of countries in 1870. We can use this to see what happened between then and 1998, the latest year of his data.

Workers can benefit directly from an increase in productivity in two different ways. At one extreme, they could take all the extra in the form of more income. Their material standard of living would increase.

At the other end of the spectrum, they could maintain their existing level of real income and simply work shorter hours.

Shorter hours do not necessarily just mean a shorter working week; an increase in the number of days allowed for holidays also reduces total annual hours worked.

Between 1870 and the end of the 20th century, productivity levels increased massively. Workers chose to take the bulk of this in the form of higher real incomes. GDP per head rose over this period at an annual average of 1.4 per cent in the UK, 1.8 per cent in Germany and 1.9 per cent in America.

The annual rates may seem small, but over a period of well over a century they compound dramatically. GDP per capita in Germany, for example, rose nearly 10-fold.

In addition, there was a slower but nevertheless appreciable reduction in average total hours worked. In each of the three countries it fell by 0.5 per cent a year, meaning a halving of annual hours over the 1870-1998 period. The fall in annual hours halted during the 2010s. But there is clearly now a desire to revive it.

There is no problem in principle with reducing working hours. It is exactly what has happened in the developed economies of the world for the past 150 years.  

The four day week in itself is a Good Thing. But it has to be underpinned by increases in productivity. Both increases in real income and shorter hours must be justified by more being produced in the hours which are actually worked.

This is a real worry. Productivity growth stalled in the 2010s, and it is no coincidence that the reduction in hours did as well. We cannot afford this. The risk is that many workers, particularly in the public sector, will remain in the mindset created by lockdown and furlough of a bit less pay for a lot less work.

As published in City AM Wednesday 23rd February 2022
Paul Ormerod
Image: pixabay

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