Can a Shorter Workweek Reduce Unemployment?

Abstract

A simulation model of the West German economy is being used to evaluate alternative policies for attacking the unemployment problem by reducing normal working hours. This paper reports the analysis of five policies to assess their effect on unemployment, on finances, on inflation, and on the overall economy of the country. The model includes feedback paths that have been neglected in much of the current literature, and it has yielded many surprising results. One is that a 5% reduction of the workweek would have little effect on real aggregate demand for goods and services, whether or not workers were compensated fully for the reduction in hours. Simulation results were that such a reduction in hours increased employment 3.6% if hourly pay remained unchanged and 4.4% if workers were compensated for lost wages. Not sur prisingly, the latter alternative was the more in flationary of the two. A 2.5% annual reduction in working hours was very effective in reducing unemployment. The paper goes on to discuss deficiencies in economic theory, their relation to modeling, and practical problems in forecasting. It concludes with observa tions on the role of simulation in establishing public policy.