Job polarization, wage distortion and the 4-day workweek: who benefits from modern economic development?

In early 2022, Spain will launch a new pilot program aimed at improving working conditions: the four-day workweek. The concept is very simple: work less, earn the same. The idea is not new in itself, similar pilot projects have been launched in Iceland or by individual companies such as Microsoft Japan or Unilever New Zealand (among many others), all of them crowned with success. But how is that sustainable? If employees work less, they produce less, therefore they should be paid less? How can a company pay for it? Well thanks for asking, here’s how it works.

Firstly, companies cut useless time, such as break times or lengthy meetings. In the case of Spain, lunch break has been shortened from 2 to 1 hour only, which instantly makes workdays one hour shorter. Secondly, the entire assumption that workers will produce just as much with reduced working hours relies on a simple economic observation: diminishing marginal returns. Simply put, you are the most productive during your first work hour and the least productive during your last. Given that, reducing working hours should not reduce output my much given that the last hours were quite unproductive. In addition, workers have the opportunity to use their extra day to rest, spend quality time with friends and families or engage in activities. The benefits are even larger for young parents who get to spend more time with their children and save money on daycare. This has significant impacts on overall happiness and stress levels which makes employees more productive overall. Even more than that, the productivity gains due to better work-life balance for employees are so large that output and profits might even increase for employers, as demonstrated by Delsol, a Spanish software company who, after implementing of its own accord a 4-day workweek has since hired 19 people, seen absenteeism decrease and revenues increase.

“In appearance, this is counterintuitive, but working less leads to producing more. This correlation is explained by a better quality of life, better health and better work-life balance.”

Katja Schaer, journalist for RTS

But there’s a catch. While this policy has provided great benefits in the public sector or in the tech industry, not all sectors and companies can benefit from reduced work hours. In the case of Spain once again, many small companies or companies in the food or tourism industry will not be able to implement such policies because of either the constant need for workers to serve customers or because of low productivity and margins inherent to the domain of activity.

This observation is another example of a trend that has taken place in our economy over the last 40 or so years: technology only benefits high-skill workers. This phenomenon, called the skill-biased technological change (SBTC), has been documented since the 1980s. Put it simply, technology helps high-skilled workers be more productive because only this type of worker is able to use the full potential of new technologies, particularly information and communication technologies. In addition, due to competition with low-income countries, more and more manufacturing jobs (medium-skilled) are being displaced elsewhere, leaving more room for low-skilled jobs (non-routine jobs that cannot be automated but provide low value) and high-skilled jobs (non-routine jobs that cannot be automated and provide high value). While free trade has slightly increased wage inequality in the US, the true culprit of this widening gap is technology.

Source: Autor, D. (2015). Why are there still so many jobs? The history and future of workplace automation. Journal of Economic Perspectives, 29(3), 3-30

Skill-biased technological change does not only affect employment, but also wages. Since ICTs help high-skilled workers become more productive, wages for this type of workers have kept increasing in line with productivity, while wages for the average workers have stagnated.

Let us however not lose hope, as it is not so much technology that increases inequality, but how governments react to technological changes. The EU and the US have similar levels of trade liberalization and technological endowment, yet widely different levels of income and wealth inequality.

This increasing inequality between the two continent is explained by many policies undertaken by US legislators such as cutting top tax rates, lack of opportunities for the poorest children, lack of universal healthcare, a decline in the minimum wage, union busting efforts, reticence to move out-of-state, the recent fallouts of the pandemic that disproportionately hit the poorest demographic as well as the early effects of climate change.

The new economic consensus on how to reduce inequality and fight against the adverse effects of technological progress calls for strong state intervention. Namely, “preparing workers with the necessary endowments and skills to enter the labour market by investing in education, infrastructure and health care, more so in lagging regions”. Investing in societally beneficial sectors such as green energies or medical advances will lead to the development of new services that will increase the demand for labour rather than replace it. Other economists call for governments to tax capital at a higher rate than labour, which would disincentivize the replacement of workers by machines. All these policies, as well as policies aimed at correcting the causes of inequality listed above, would help society successfully transition into the new economy, where machines augment humans instead of replacing them.