Less is more?
Fri 20 Feb 2015 by Infometrics Ltd in Labour market

A recent article by the Economist suggests that we should all work less and get a life – and the latest report by the Productivity Commission on this topic suggests that no-one needs to get a life more than New Zealanders.

When compared to the rest of the OECD, New Zealanders don’t work all that many hours.  Over the past decade, New Zealanders workers spent 1.0% fewer hours working than the (34 country) OECD average.  Although, this is nowhere near on the same level as the Dutch who in in 2013 worked 22% less than the OECD average, it’s not quite as bad as the average Mexican who works 26% more, and even better than the Americans (work worked 1.0% more hours than the OECD average).  

But, what really matters is how much we produce during the number of hours we work.  Enhancing one’s productivity is one of the few ways in which we can better our standard of living.  We could always work longer hours to produce more income, but we do this at the cost of our leisure time.  Increasing our productivity means that we could work the same number of hours and generate more income to spend on the things we like.  We could also work fewer hours, produce the same amount of output, and have more time for leisure.  No matter which way you do it, increasing your productivity can be considered a means to getting a (better) life.

In the case of labour, productivity is most simply quantified by the amount of real income (GDP) produced by each unit of labour (usually worker hours). 1

GDP per hour statistics show that in 2013, New Zealand workers produced 26% less per hour than the OECD average.  This result placed New Zealand 24th on the productivity ladder when compared to its peers (putting it just after the Slovak Republic).  But for the most part, variations in GDP per hour worked can often be explained by the fact that countries produce a different mix of products.  Following this, if a country’s main income source is from lower value goods and services2, its GDP-per-hour-productivity is also likely to be lower.  Interestingly, comparisons by the Productivity Commission show that Australians are more productive than New Zealanders even within the same industries.  This result highlights that there is scope for us to improve, which is fortunate because, according to the Productivity Commission, enhancing productivity is the main way we can lift our standard of living over the years to come.

Higher productivity is becoming an increasingly important factor in generating higher incomes.  Throughout the bulk of 1990s income growth was driven by both increases in productivity and an expanding workforce.  Over the 2000-2012 period, income growth slowed as the size of the workforce neared capacity and as the growth in productivity eased.  This slowdown was partly offset by a favourable turn in the terms of trade – world prices for our exports lifted relative to the price we paid for imports, pushing up our real incomes – yet income growth still slowed below 2%. 

However, with employment at its highest in six years and labour force participation at its highest on record, we cannot rely on an expanding workforce to drive income growth as it did in the 90s.  Nor can we rely on further improvements to the terms of trade (particularly now with the price of our key exports having taken a dive) as we have done for most of the new millennium.  As a result, we are increasingly dependent on higher productivity to improve our per capita income growth and thus also, our quality of life.

So how might we go about doing this?

One of the ways we could increase our real income is to generate higher value products3.  As this idea is worthy of a whole article in and of itself and encompasses shifts in technology and capital, rather than changing the ways we implement our labour, I will leave that idea for another time. 

Another way to increase our output, given the current mix of things we produce, is to think about how we employ our labour inputs into production.  It is easy to count labour in terms of hours worked, but research tells us that even down to the individual level, not all hours are the same.

A recent study from Stanford University, suggests that there is an upper bound to productivity (output per hour) and that after a certain point, productivity begins to decrease.  Drawing from data on munitions workers in the First World War, the study showed that output slowed dramatically from the 49 hour mark and practically flatlined at around 56 hours.  The research also showed that if someone worked seven days, they most likely produced less than they would have, had they only worked for six.

Building on similar ideas of increasing productivity, the Swedish city of Gothenburg famously took on trialling a six-hour work day last year.  The idea of the trial is to test whether working fewer than 40 hours per week (at the same pay as a full week) results in higher worker efficiency, fewer sick days, and better worker welfare.

Germany and the Netherlands, which currently have some of the highest GDP per hour rankings in the OECD, also support shorter work hours.  Both countries have six-weeks of paid annual leave, compared to our traditional four weeks, or Greece’s two weeks.  The Netherlands has also popularised four day work weeks and caps work hours to 2,080 per year (this works out to be 45 hours per week with six weeks of holidays).  Even Australia, which has a more similar industry mix to New Zealand, only allows employers to request up to 38 hours for an average work week.

Even though we may not produce the same high value products as Germany or Sweden, perhaps we could employ some of their ideas about producing more, by working less.   

1 For more information on measuring productivity please find section 2.1 of the Productivity Commission’s 2013 research paper

2 For example, sweatshop workers can churn out a great number of Nike shoes per day but still not earn as much per hour as an insurance consultant. 

3 If your work is more valuable, you can earn more in the same amount of time than someone whose work is less valuable.  This is crudely demonstrated in the salary of a doctor vs. the salary of a cleaner. 

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