Nikos Koutsiaras – Working time flexibility: A socially questionable but politically favoured policy choice

The implementation of labour market reform, including the introduction of flexible working time arrangements, has thus far, been poorly conceived and/or inadequately implemented, thereby making adjustment of the European economic and social model hard to realize, suggests Nikos Koutsiaras.

Labour market policy and institutional reform has undoubtedly been attached a prominent role within the context of European economic strategies aiming at increasing employment and reviving growth, as well as facilitating adjustment of the European economic and social model to deep-going changes in economic exchange, social organization and politics. Nevertheless, an increase in European trend growth rates has, thus far, not been achieved, the recent economic upturn being attributed to mere cyclical factors. At the same time, labour market performance has not much improved and rates of unemployment have remained high, especially in the big continental economies. One may, thus, suggest that implementation of labour market reform has, thus far, been poorly conceived and/or inadequately implemented, thereby making adjustment of the European economic and social model hard to realize.

Admittedly, economic research has failed to establish empirically robust causal links between any particular design of labour market institutions and labour market performance. However, it has convincingly demonstrated that heavily regulated labour markets distort the matching of (labour) supply and demand, disrupt adjustment to trade and technology shocks, hence delaying economic restructuring and, also, prolong and amplify the impact of cyclical swings in economic activity. While falling short from advocating wholesale deregulation of the labour market, economic research has, nonetheless, shown that labour market reform should be comprehensive and coordinated with product market reforms, social policies and macroeconomic policy. Besides, piecemeal approaches may preclude the advantageous manipulation of interactions amongst labour market policies and institutions and lack of policy coordination may lower the quality of reforms, thus reducing potential gains and further deferring their realization, whilst also curtailing compensation of losers. Yet, owing to the unequal distribution of benefits and costs amongst different groups of workers and to their asymmetric allocation over time – costs occur in the short-run, while benefits are attained in the medium to the long-run – the political economy of labour market reform is turned into a zero-sum game that governments find hard to administer, let alone shape its outcome.

Searching for an alternative organization of working time

Nevertheless, European governments have not been inactive, although their reform actions have barely been inspired by the findings of economic research. Furthermore, despite national divergence in regard to labour market institutions and performance, revealed national policy preferences display a considerable degree of convergence, which has largely been caused by concentration of reform initiatives mainly in two areas, namely organization of working time and liberalization of flexible – i.e. other than the regular full-time – employment contracts. In regard to the former, government actions and/or collective agreements have primarily been aiming at inserting flexibility into working time arrangements in order to better respond to business needs and employee demands. Business needs are mostly related to adaptation of working hours to variations in workload, whilst employee demands are associated with preferences for leisure and the so-called work-life balance.

Flexible working time arrangements range from systems offering the possibility of varying the start and end time of work on a daily basis to schemes entailing broad options for the accumulation and compensation of hours over longer periods of time. Although they usually are meant to take the place of other forms of working time organization that go beyond the normal working hours (e.g. overtime, night work, shift work), in practice they often complement those forms, each working time model being tailored to sector specific and/or firm specific needs. Thus, there is enough empirical evidence to suggest that industrial sectors and small-sized establishments may, generally, be better served by traditional working time organization methods and simple forms of working time flexibility, while services and, especially, knowledge-intensive sectors, as well as bigger firms are more likely to take advantage of highly flexible arrangements. On the other hand, it may reasonably be argued that flexible working time arrangements may mostly be demanded by highly skilled employees, whose propensity to substitute leisure for income may, other things being equal, be sufficiently high, at any rate higher than that of the less skilled. The latter would, thus, probably opt for traditional working time models entailing increased compensation for non-standard working hours.

Economic justification for flexible working time arrangements has been in no short supply. Thus, introducing working time flexibility is found to result in reduction of paid overtime hours and, hence, in cost savings, reduced absenteeism, better adaptation of the working hours to the workload, increased efficiency in the use of machinery and equipment, higher job satisfaction and increased investment in human capital. Those all are sources of increased labour productivity and greater productive efficiency within firms, a substantial part of aggregate labour productivity increases and an important part of total factor productivity increases being accounted for by developments within firms. Yet, it is often maintained that, in addition to increases in productivity and output, macroeconomic effects of introducing flexible working time arrangements entail, also, employment gains, stemming from increased labour supply and growing labour demand. The former is related to improved work-life balance prospects and, thus, to increased attractiveness of work. The latter is, apparently, linked to higher output and, also, to wages being lower as a result of increased labour supply.

However, positive employment effects of introducing flexible working time arrangements should not be overstated. Working time flexibility may effectively amount to a labour saving production technique, its positive employment effects being largely confined to skilled labour. In fact, increased efficiency in the use of capital and equipment, following improvements in the organization of working hours, may encourage substitution of capital for less skilled labour. And an increase in the ratio of skilled to unskilled labour, presumably across the range of economic sectors, may allow for wider use of flexible working time arrangements, thus further diminishing employment opportunities for the less skilled. Nevertheless, reduced employment opportunities and high levels of unemployment amongst the less skilled may only ostensibly be related to working time arrangements. But they may causally be linked to broader labour market rules and institutions effectively pricing out low productivity workers. As a matter of fact, substitution of capital for less skilled labour and, for that matter, widespread use of various labour saving production techniques in European Union economies, especially in the big continental ones, has been triggered by tight employment protection rules that insulate those employed from competitive pressures, hence curtailing effective labour supply and preventing wage adjustment. It has also been prompted by minimum wages far exceeding the productivity of those receiving them.

A reluctant European labour market reform

One is, thus, introduced to the political economy of European labour market policy. Failure to reform core labour market regulations and accordingly amend income support systems – e.g. reducing the level of minimum wages and filling in the resulting “fairness gap” with in-work benefits and/or tax credits – and, consequently, reliance on peripheral reforms may simply reflect the influence of powerful economic interests effectively hijacking the policy process. Thus, labour market insiders, dutifully represented by trade unions, may hardly tolerate weakening of employment protection rules, lest their effective bargaining power in relation to wage setting is circumscribed. In exchange, though, they may reluctantly, perhaps, accept introduction of working time flexibility associated with income losses owing to reduction of paid overtime. And employers may often prefer being allowed increased internal labour market flexibility, thereby increasing productivity of their workforces, instead of merely being able to adjust the size of their workforces, albeit at the expense of investment in firm specific human capital and labour productivity. Obviously, increased profits for employers and higher wages than would otherwise be for labour market insiders may little benefit unemployed workers, whose employment opportunities have recently been much linked to the so-called flexible employment contracts. Employers have, thus, been given a low-cost means to adjust the size of their workforces, thereby complementing internal labour market flexibility. Yet, in exchange, labour market insiders have secured reductions in normal working hours or other concessions, often associated with increased trade union rights in regard to implementation of flexible working time arrangements. However, not only have two-tier labour markets thereby emerged, but unemployment has also remained high.

The policy lesson is, thus, simple: efficiency and fairness in European labour markets may not improve unless core labour market institutions and policies are thoroughly reformed. Obviously, this amounts to no less than establishing new political equilibria, which, given the configuration of economic interests in regard to existing institutions and policies, requires strong leadership on the part of governments. Unfortunately, though, leadership has often been a scarce political resource.

Further links

Out of time: Why Britain needs a new approach to working time flexibility

Labour time flexibility for employers or employees?

Special issue: recent articles, time/governance
Tags: EU, labour, nikos koutsiaras