Tuesday, July 8, 2008

Responding to Comments

A previous post concerning the government's report of a 40 percent increase in overtime hours in the first quarter of this year over the same period last year elicited the following two comments:

"... Whether or not this increase can be imputed to the detaxation of overtime is a question that will have to be sorted out by econometricians... "

At a time when the economy is anemic,
can you think of another cause for it ?...

and

Indeed, the question in itself is almost funny. Of course the detaxation has effects.


To which I respond, Gentlemen, you are too easily satisfied. The problem with the government's good news is that it is too good. The economy has indeed been "anemic," with growth in aggregate demand around 2 percent, if that, so what could account for a 40 percent jump in overtime? The theory of the detaxation was that growth was inhibited by supply-side restrictions in the labor market. It was too expensive for an employer to offer additional hours of labor to meet increased demand, so the solution was to reduce the expense. But there has been no increased output. So if more overtime hours have been added, it is plausible to think that firms have decided to meet existing demand with fewer workers working longer hours, which is now an economically viable alternative. Indeed, this was one of the predicted possible consequences of the detaxation proposal. The contention is not about whether "detaxation has effects." The question is whether those effects are benign or perverse (that is, is overtime being substituted for additional employment). So I reiterate: the proof has yet to be given. The sheer number, 40 percent, even if accurate, doesn't tell us what we want to know, and the claim that it does is sheer ideology, because, after all, the actual goal of detaxation is not to increase overtime hours but to increase output.

Of course it is perfectly possible that the workers earning overtime wages will increase demand in subsequent quarters by spending their earnings. But that is a separate issue from the question of whether supply-side rigidities were responsible for a suboptimal allocation of resources given current demand.

6 comments:

TexExile said...

Art,

I take your point that the picture may be more complex than your interlocutors suggest, but the significance of the 40% number in relation to the 2% rise in aggregate demand is not at all clear.

The 40% rise is not a 40% jump in total hours worked -- it's a jump in the number of overtime hours worked. This could imply a marginal increase in total hours (with, it follows, a marginal impact on total output). If we assume that 10% of hours worked are overtime, then this implies perhaps a 4% increase in hours worked -- greater than the growth of aggregate demand but not spectacularly so.

I honestly don't know what the truth is here, because I've no clue what proportion of hours worked in France are overtime hours. But unless we know that, we can't say much about the meaning of the 40% increase.

Best,

TexExile

Arthur Goldhammer said...

TexExile,
Yes, quite true. I didn't mean to imply that the 40 and the 2 were directly related. The real point is that the growth rate has declined year-over-year compared with 2007, even as overtime has increased. This is not a picture consistent with the loosening of supply-side rigidities. To me it suggests the likelihood of a tradeoff between overtime and employment levels, but I could be wrong about that. A careful analysis of the numbers is needed before any firm conclusions can be drawn. I think we agree about that, and I hope that the original commenters will also agree that the case is not open and shut.

MYOS said...

Could it be that these overtime hours were already being done but were not "declared" by employees who thus had no taxes to pay on them? Since now taxes aren't levied on overtime hours, there's more incentive to "declare" them.

In a separate development: managers and executives will no longer have overtime pay. Managers or executives may now be made to work even on holidays (days off since Napoleon or such) with just a 10% per-day bonus.

Other workers may work 48h/week, with no day exceeding 10 hours. This, I believe, goes back to 1919 for the French labor laws. On the other hand, if the basic workweek remains 35 hours, that'll be lots of overtime pay.
Of course, some 75% French people have no intention of working more than 35 hours plus a few hours overtime here and there (due to family responsibilities and transportation constraints apparently - a man was explaining he worked 8 hours but had 4 hours of transportation each day so even if he had wanted more hours, he couldn't as long as his pay forced him to live so far away from the city center).
I wonder how it'll work out.

Sarkozy's snipe about the "invisible strikes" may come back to haunt him.

Arthur Goldhammer said...

Here's some documentation:
http://www.travail.gouv.fr/IMG/pdf/2008.04-17.1.pdf

Note that most of the increase is concentrated in smaller firms, and the smaller the firm, the greater the increase. In larger firms (>500 employees), there was actually a decrease in overtime. This suggests that smaller firms, which may have been forced to hire an extra worker in the past, can now afford to put an existing worker on overtime. These numbers are for the fourth qtr of 2007, not the first qtr of 2008.

Marc Pasturel said...

"... it is plausible to think that firms have decided to meet existing demand with fewer workers working longer hours, which is now an economically viable alternative... "

I agree.


"... The question is whether those effects are benign or PERVERSE (that is, is overtime being substituted for additional employment)... "

What's perverse about maximizing profits by minimizing the number of employees ?...


"... after all, the actual goal of detaxation is not to increase overtime hours but to INCREASE OUTPUT... "

What's wrong with the goal to INCREASE PROFITS ?
Don't they:
- enrich the shareholders, the company owners, the EMPLOYEES and the government hence the GENERAL POPULATION in the short term,
- increased investments by the companies which will, in the medium-to-long term, result in increased benefits to all the above-named beneficiaries ?

Arthur Goldhammer said...

Marc,
There's nothing wrong with increasing profits per se, but you have to remember that, on your hypothesis, this profit increase will have been paid for by decreased tax revenues. Depending on what the numbers turn out to be, there may have been a net transfer from the public treasury to private hands. If the money forgone by the state then has to be collected by new taxes to pay for social security costs, the ultimate transfer may turn out to be from one group of citizens to another. Most of politics is a struggle to determine the size and direction of such transfer payments. People will differ as to the social welfare effects. As a matter of personal preference, I tend to dislike government measures that socialize investment risks but privatize gains. Conversely, I prefer to socialize life risks (health, distribution of talents, adverse consequences of hard times) by asking winners to share their wealth.