Does Higher Efficiency Lower Employment Rates?

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Does efficiency kill employment? What are the implications of the efficiency-employment trade-off for the economy?

Contrary to a common misconception, efficiency doesn’t kill jobs. This myth is based on the idea that there is limited work to be done, and thus it must be shared strategically to maximize employment.

In this article, we’ll take a look at why creating inefficiency actually hurts employment and national wealth.

Efficiency and Employment

The fallacy that efficiency increases unemployment—and that inefficiency leads to higher employment—leads to labor union practices that spread the work amongst as many people and over as many hours as possible.

We’ll look at two spread-the-work strategies, a subdivision of labor and a shorter workweek, and explain how they actually decrease productivity, which hurts employment and national wealth.

Policy 1: Subdivision of Labor

One way that unions spread work is by mandating that only members of a particular union perform tasks that are specific to that trade—even if the tasks are minor aspects of another worker’s job. For example, a plumber isn’t allowed to remove tiles herself in order to replace a pipe in the shower. Instead, she must call a tile-setter to remove and subsequently repair the tiles. Although the tile-setter has gained a day of work that she otherwise wouldn’t have had, this spread-the-work practice increases the cost of the work, which harms overall employment. 

The spread-the-work requirement forces the homeowner with the broken shower pipe to pay two people instead of one. If the homeowner could have hired only the plumber to do the job, she would have used the extra money to buy a sweater, which means that the wages paid to the tile-setter would have gone to the sweater maker instead. While the equation simply trades one worker’s wages for the other’s, the homeowner loses because she comes out with a fixed shower, when she could have had a fixed shower and a sweater. Both the fixed shower and the sweater represent overall production, which is an aspect of national wealth, meaning that subdividing labor hurts production and national wealth. 

Policy 2: Shorter Work Weeks

Another method unions use to spread work is to promote shorter work weeks, with overtime pay of 150 percent of normal wages. Reducing the standard work week from 40 hours to 30 hours is intended to benefit workers in two ways: 

  1. If an employee must still work 40 hours, the overtime pay will increase her paycheck. 
  2. If one employee’s hours get cut to 30, someone else will gain employment to pick up the extra 10 hours of labor. 

In reality, there are two ways that a shorter work week can play out—and neither increases employment in the long run. 

One possibility is that the work week is cut to 30 hours without increasing the hourly wage to compensate for workers’ lost earnings. This practice merely shifts labor hours and payroll costs among more workers, without increasing the company’s output or altering its labor costs, so the company’s production and profits remain the same. As a result, the company has no extra money to create jobs by expanding its own business or support wages in another industry by spending the extra profits elsewhere. Additionally, the workers whose hours were cut from 40 to 30 are taking home smaller paychecks, essentially subsidizing the wages of the new employees. 

Another possibility is that the work week is cut to 30 hours with a one-third increase in hourly wages, so that workers are taking home the same pay for less work. This option raises production costs, which puts some companies out of business and decreases supplies of the product. At this point, there are two possibilities:

  1. Limited supplies and increased production costs raise the price of the product, meaning that consumers’ dollars don’t go as far. Assuming the workers are among those customers, although their paychecks haven’t changed, they end up getting less for their money.
  2. Company closures raise unemployment levels, which decreases demand for the product and lowers prices. (Shortform note: The author doesn’t elaborate on this possibility, but presumably the lower demand and prices hurt the companies that are still in business, which could lead to cuts in pay or in staffing.)

(Shortform note: In recent years, a number of companies have begun experimenting with 30-hour work weeks, including Amazon, which offers workers the option to work reduced hours at 75 percent of their salaries, with full benefits. A Swedish company called Brath gives workers full pay for 30-hour work weeks, and company leaders insist that shorter days make employees more productive. For more information on this trend, read our summary of the article, “Enjoy The Extra Day Off! More Bosses Give 4-Day Workweek A Try.”)

Full Production—Not Full Employment—Increases National Wealth 

Fallacy: Full employment is the goal for national wealth and a high standard of living. 

Reality: Full production is the goal for national wealth and a high standard of living. 

Many people mistakenly push for full employment, thinking that will be the surest way to increase Americans’ prosperity and the national wealth. However, as we’ve illustrated, policies that aim solely to increase employment—including public works projects, labor union make-work practices, and 30-hour work weeks—do not benefit individual or national wealth. 

Furthermore, the progress and innovations that have increased America’s wealth have actually reduced employment by eliminating the need for unfit workers, such as children and the elderly. By contrast, countries that have primitive, labor-intensive production methods have full employment out of necessity, but the people and nations are significantly poorer than further-developed countries with lower employment levels. 
In reality, the goal should be to achieve maximum production, which raises wealth. Higher output means a greater need for workers and more goods and services for everyone.

Does Higher Efficiency Lower Employment Rates?

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Darya Sinusoid

Darya’s love for reading started with fantasy novels (The LOTR trilogy is still her all-time-favorite). Growing up, however, she found herself transitioning to non-fiction, psychological, and self-help books. She has a degree in Psychology and a deep passion for the subject. She likes reading research-informed books that distill the workings of the human brain/mind/consciousness and thinking of ways to apply the insights to her own life. Some of her favorites include Thinking, Fast and Slow, How We Decide, and The Wisdom of the Enneagram.

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