Flexible working hours – Genius or madness

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The flexible working hours bill aims to increase the degree of ‘flexibility‘ in the labour market for households with a child under the age of 5 or a disabled child under the age of 18. Now I’ve heard all sorts of complaints and complements about this bill, so I’ll try to talk about the way I see it.

This bill could be ‘binding’ (forcing some firms that were inflexible to be flexible, incurring a cost on some firms) or ‘not binding’ (implying that it does nothing, with no cost on firms). In the non-binding case the law is simply a waste of money, so as a result we must focus on the case when it changes firm behaviour.

Now the Greens believe that it would be binding, but would have little significant cost to firms, while National believe that it would provide a regulatory burden to firms, and that these types of arrangements were best sorted out in employer-employee negotiations.

As far as I can tell, if all the benefit from this legislation was private, then National is right. This is because the employee could negotiate a lower wage for more flexible hours, ‘splitting the surplus’ depending on their relative bargaining positions. However, if we believe that their are significant social benefits that are not internalised by the employer or employee, the Greens are right(ish), as the newly flexible hours will benefit other people.

Some examples of the social benefit are, less congestion (given that people are working different hours), the benefit to the child of seeing their parents (if the parents values associated with this is less than the full social value), and some arbitrary benefit to society from providing for families.

However, there are costs associated with this policy. Firstly, there are a number of job types (if not all) where one employee will have a positive impact on the productivity of another employee. If this is the case, having employees work at different times implies that the output they produce is lower. This hurts the firm and society (as there is less production), and may also lead to a lower wage for the employee and their work mates (as wages should be linked to productivity). You might try to counter this by saying that an employee that spends more time with there child will be more productive, but if that was sufficient to counter this first effect, employers would already let them do it!

Also there is the fabled impact on employees without families: “Don’t they have to work harder when the employee with a family isn’t there?” Well they might have to, but even if they didn’t they would get the lower wage described above from a lower level of productivity. The one plus for people without children is that they would now be favoured in the labour market, as employers would know that they might have to give people with children flexible working hours and would discriminate (you might say discrimination is illegal, but it is also difficult to detect).

The main loser will be the person who has a family but wants to work, they will not be offered jobs (unless they hide the fact they have kids), and if they do they will be offered a lower wage. Even worse, people already in work, but with young children will find it difficult to move up in the workforce, as the potential for them to pull out the flexible working hours card makes them a liability in more important positions.

Overall, I believe that the social costs of this policy outweigh the social benefits, and would be more likely to call this madness than genius. Ultimately, I don’t believe this policy will benefit anyone, not even the group it is supposed to help. Hopefully the policy ends up being a non-binding, waste of space.

  • Kimble

    “but if that was sufficient to counter this first effect, employers would already let them do it!”

    Just a quibble here. I reckon there are possibly better ways to run businesses that arent currently known and are there are significant barriers to finding out. In a competitive industry trying something new wouldnt be advisable for a well performing firm. Why would they risk it? so only poor performing firms will give it a go hoping for some benefit (even this would require a leap of faith from employers, as the benefits are difficult to conceptualise).

    In a non-competitive industry there may be more scope for giving it a go, as they will be trying (I assume) to squeeze every easy cent out of their position. Then again without a high level of competition only the greed factor will force it in this direction. And with that you have some sort of agency problem I expect. (“Now if I work my ass off and Initech ships a few extra units, I don’t see another dime; so where’s the motivation?”)

    In all I reckon it would take a push from the government to get this sort of thing accepted on a widespread basis. They obviously think so too, and probably view the already tight as a drum labour market as a lever that will twist employers collective arms.

    As social experiments go, it may be worth a shot, but given that the risk is making NZ less competitive in the global marketplace, making our labourforce less productive, and that few jobs can properly flexible, I reckon it is an experiment that we could let someone else try first.

    This topic, and the cleaner car one, are perfect for showing that politicians dont really think things through and are too focussed on being seen helping rather than actually helping.

  • Hi Kimble,

    I think the British have implemented a scheme like this, however I don’t know anything about the success of the scheme over there, I might look it up at some point this week.

    I fully agree that firms may not know the best way of functioning per se (especially since industry structures are so dynamic and fluid), but I also don’t believe that introducing flexible working hours will provide a situation where a product is made more efficiently. Firms know more about the inputs and outputs required to make their product than the government does, and blanket regulation like this will make it more difficult for firms that require their staff together at the same time than places that don’t (eg manufacturers vs lazy arse economists 🙂 ).

    As I don’t think that the government really believes it will be more efficient or productive, then the true goal must be related to equity. If the positive externalities from more flexible working hours were sufficiently large then this would make sense, however I would be surprised if that result could be quantified. Ultimately, I think this is the crux of the issue – the size of the positive externalities to society (damn normative stuff).

    On a tangent, it seems to me that the government (and the CTU) believe that employers are the devil. That confuses me, as employers are the buyers in the labour market, they are the consumers, I thought we loved consumers? Employers are also part of households, they create jobs, they do things too. As long as we can keep employer and employees bargaining positions relatively even, then I don’t see why we have to attack either group, they are both beautiful economic agents in their own right.

    One extra point, although the government may feel that this is a good time to further increase firms compliance costs as the unemployment rate is so low, then they should have a look at firm margin data. Margins are crap, which implies that many firms may not be able to survive all this cost pressure.

  • Kimble

    “… it seems to me that the government (and the CTU) believe that employers are the devil. That confuses me…”

    ?!?!!

    The CTU does think that employers are the devil. They are the owners of capital, the grand oppressors. It is they against whom the great struggle must be fought!

    I dont think Unions have ever been pure in their intentions. They have never really “just been there to protect the little guy”. They have always been a political movement at heart. One of their telling stances is on tax. If unions really cared about the workers they represent, they would be pushing for tax cuts (just like any student union worth its salt should protest every fee increase.)

    I have to admit that my opinion of the Unions isnt the most glowing and it goes beyond my natural cynicism.

  • I guess confuses is the wrong word. I meant upsets me. At one point the CTU was saying that wages should be pinned to house prices, so houses stay affordable. This is stupid as higher wages will lead to faster house price growth until we end up with massive inflation.

    Also we expect house price to fall during mid-2008, would the CTU accept a cut in wages in line with house prices – I think not.

  • Kimble

    Mate, I have zero respect for Unions and it is not helped by that ‘housing prices’ sort of idiocy.

    I mean, if they spend an afternoon drafting a press release to say something so incredibly stupid, how are we to trust that they have the mental capacity to determine fair wages, hours, conditions, etc?

    They must have seen house prices go up, they wanted wages to go up too … !!! solution!

    It just pisses me off that these influencial groups lack the ability to think past stage one.

  • I understand why unions can be useful, insofar as they increase employees bargaining power. However, we have to realise that they provide market power to employees, and just like with any seller of a product, excessive market power leads to significant market failures.

    People have to understand that the goal should be for employers and employees to have relatively equal standings in terms of bargaining power, and that isn’t the goal of unions, unions are there solely to increase the market power of employees.

    In practical terms I think the CTU is a bit nutty, I rekon they could do a far better job of manipulating the public for there own ends 🙂

  • Tim H

    Kimble,

    I had the same thoughts as you expressed in your first post, that the statement “but if that was sufficient to counter this first effect, employers would already let them do it!” ignores some of the barriers to workplaces becoming more productive, which might be reduced by a change in law.

    Actually, you could extent the idea of ‘barriers to more productive working arrangements’ to a broader concept of ‘barriers which prevent workplace culture and norms from changing’. I was thinking along the following lines:

    (a) All workplaces share, to some degree, a work ‘culture’, including norms around working hours, hiring practices, workplace behaviour, the nature of employer-employee relationships, etc.

    (b) This culture might lead to outcomes which aren’t very ‘good’ (are undesirable in some moral sense). For instance, a part of the culture of business in the past was that women weren’t seen as fit for top positions and therefore would neither be hired for those positions, or supported in those positions by their male subordinates. They may have been potentially better leaders, but the attitudes of the time prevented them reaching this potential. This ‘equilibrium’ clearly wasn’t fair, or just (and was probably even less productive for firms than the no-discrimination alternative).

    (c) With a different culture, a (morally) better ‘equilibrium’ would result, but there are barriers preventing this work culture changing. For instance, if a women was given a managerial position in charge of a team of hostile and unwilling workers, she would be unlikely to be effective, even if she could have managed a non-hostile team of employees better than anyone else.

    (d) Where there is an old-fashioned work culture which is less desirable than some alternative, but nonetheless sustains itself, things can be improved by some ‘shock’ that forces the culture to change, such as a change in employment law. Laws prohibiting gender discrimination probably helped dissolve discriminatory attitudes at a faster rate than would otherwise have occurred.

    Therefore (e) some law changes can be justified because of their effects in changing norms, which ultimately give us a better outcome. I think the phrase the Nats like is ‘social engineering’ (although their criticisms are noticeably absent when discussing ECONOMIC policies which have social consequences).

    Anyway, I don’t really know whether the ‘flexible hours law’ fits within that type of argument, but I think we should recognise that such an argument (ie, “government policy is justified by the existence of ‘multiple equilibria'”) can potentially hold. I don’t know the details of the law, but my gut feeling is that efforts towards more flexibility in working hours are a good thing. And I’m generally no Labour lover.

    Another thought occurred to me when I read this:

    “The main loser will be the person who has a family but wants to work, they will not be offered jobs (unless they hide the fact they have kids), and if they do they will be offered a lower wage”

    I presume it is illegal to ask a prospective employee whether they have or are planning to have kids soon? If so, discrimination in hiring will be directed not just at current or soon-to-be parents, but anyone of the demographic most likely to take advantage of the flexible hours law (probably women 25-35 or so).

    Cheers
    Tim

  • Kimble

    Hi Tim,

    I agree that the changes could potentially help, but I also agree with Matt that the benefits as we reckon them now, wont outweigh the costs.

    There is potentially some other factor that we are not seeing, that no one can yet see, that would mean the changes would turn a net benefit. However, we dont want the government to make a habit of legislating a change to current laws on the hope that the situation is saved via some sort of ‘deus ex machina’.

    “I presume it is illegal to ask a prospective employee whether they have or are planning to have kids soon? If so, discrimination in hiring will be directed not just at current or soon-to-be parents, but anyone of the demographic most likely to take advantage of the flexible hours law (probably women 25-35 or so).”

    I reckon it is already happening. And to be perfectly honest it is fair enough. The chance that a woman will leave the workforce for a time to have children is a risk that is known and therefore accommodated for in the hiring process. It makes female employees less valuable that male ones.

    PS. All policies are economic policies.

  • “PS. All policies are economic policies.”

    Love it. I’d go a step further and say everything is economics. Of course I’m sure every social science can say the same thing 🙂

  • Hi Tim,

    I fully and completely buy that argument that the current structure of a firm may not be optimal, and I also fully subscribe to the idea that government policy can create pareto improvements in the case of multiple equilibria.

    However, if this is an argument of only productivity, then the current equilibrium would be unstable as any firm that suffered a slight upward shock to their degree of hour flexibility (a lenient manager arriving for example) would find there to be an increase in production, and so would not revert to their original level of flexibility.

    As a result, I still feel that supporting this bill relies on an equity argument. Given my own value judgments this doesn’t quite stack up, but of course everyone has their own set of value judgments and will reach different conclusions.

    Although I do not expect flexible working hours to destroy businesses or anything, I fear that there are some industries that will have big problems, especially manufacturing. Heap this on top of the high exchange rate, tight labour market, and already tight margins and I can understand why manufacturers aren’t happy.

    Finally, I completely agree with your last point, damn those perverse incentives.

    Good work Kimble and Tim, I like your comments 🙂

  • I think that one way to tackle this work/life balance thing is in the creation of 9 to 3 jobs, which at least fit all those parents out there with children of school age.

    I know of a factory with a 24 hour operation which looked at having a 9 to 3 shift (as well as a 3pm to 12am and 12am to 9am shifts), however the unions got in their way by erecting such a huge monetary obstacle in front of the 9 hour shifts that the idea was canned (eg overtime). The factory looked at this idea because they had many instance of parents taking a whole shift off sick simply because so they could pick up a child from school at 3pm, and similar.

    In terms of overcoming old fashioned thinking, I would say that wider acceptance of 9 to 3 shifts would be a big step forward. Simply having a requirement for “flexibility” is too lacking in definition, too wishy washy and hard to enforce.

  • kentp, interesting comment, I always like to hear stories of firms being inventive. I didn’t realise that people actually got overtime for a 9 hour shift, very interesting.

    The definition of flexibility is a bit wishy washy, and that may make it difficult to enforce. The problem with defining it more stringently is that it may have big costs to specific types of firms, etc. The 9-3 idea is interesting though, I wonder if I could work 7am-8pm everyday and get an extra day off, that would be awesome

  • Kimble

    The overtime cost of a 9-hour shift would be one hour a day per worker. If this is what was standing in the way of the scheme progressing then it probably wasnt that much more efficient anyway.

    Now, if the 9-3 workers were paid less per hour…

    As a side note, the EPMU is decrying private equity managers. This Unions vs. Private Equity squabble may be new to NZ, but IIRC it is a debate that has been going on for a few years in the UK.

    The Private Equity managers dont have the same sort of emotional ties that traditional owners would to the business they are managing. This makes it easier for them to see and exploit opportunities overseas, ie outsourcing and closing home offices etc.

    The Unions finally have some ‘bastard capitalists’ to rail against! They must be loving it.

  • Kimble

    Should be “The overtime cost of a 9-hour shift would be one hour a day.”

  • I just remember being a student and only getting 1 hour of overtime on a “11” hour shift, which was actually 12 hours. Those bastards 😉

    “The overtime cost of a 9-hour shift would be one hour a day per worker. If this is what was standing in the way of the scheme progressing then it probably wasn’t that much more efficient anyway.”

    I agree with you, but better say that if there are positive externalities to society from the change in shifts it might be socially optimal even if its not optimal through the employee -employer bargaining process.

    I’m sure that there could be a information asymmetry argument that could counter our point of view as well Kimble, maybe