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June 25, 2010

Increasing hours worked versus increasing hiring

The current recovery has been characterized by increasing production and sales without an associated expansion in employment. Part of the explanation for the lack of hiring has to do with increased productivity of workers (output per hour worked)—either by improved production methods or simply requiring more effort from staff per hour worked. Another reason why firms have been relatively slow to hire is that, in addition to slashing payrolls during the recession, many firms also cut the work hours of the remaining staff to levels well below prerecessionary norms. As a result, these firms have some scope to increase the hours worked by their current staff before hiring additional workers. This fact is evident in the often-cited increase during the recession in the number of people working part time for economic reasons (see here and here, for example). That number has remained relatively stable at around nine million people over the last year, but it is still more than twice its prerecessionary average.

Another perspective on the part-time issue can be gleaned from data on average work week obtained from the U.S. Bureau of Labor Statistics (BLS) Current Population Survey. Chart 1 shows the pattern of average weekly hours (not seasonally adjusted) for all nonfarm wage and salary workers during the period of January 2008 through May 2010. For ease of comparison, the chart is scaled to be relative to the 2002–07 average. Compared with prerecession levels, average hours worked declined during the recession although they really didn't begin falling until the second half of 2008. As of May 2010, average hours worked were still about 1.5 percent below the prerecession average but have been trending higher in recent months. (Note that the sharp drop in September 2009 is a quirk of Labor Day falling during the survey week and hence cutting the work week one day shorter than usual.) The fact that average hours worked has moved higher is an encouraging sign for employment growth going forward if the historical norm is any guide. Of course, a firm may need to hire new workers even when hours per worker are below average. For example, the decision to start an additional manufacturing production line will probably require hiring new staff even if existing staff on other lines are working fewer hours than usual.


The aggregate picture in Chart 1 masks considerable variation across industries. For example, Chart 2 shows the normalized average weekly hours reported by workers in the education and health services industries and in the financial industry. For these workers, although average hours worked per week declined mildly during the second half of 2009 weekly hours worked have since returned to prerecessionary levels. This performance suggests that, other things equal, additional demand for hours of work in these industries is likely to be met by additional hiring.


Chart 3 shows the evolution of average weekly hours reported by workers in the manufacturing and transportation/warehouse industries. In these industries, average hours worked began to decline in the fall of 2008, but they have recovered much of the decline in recent months and are now about 1 percent below their prerecession averages. As with the aggregate picture, the fact that average hours worked has been trending higher recently is encouraging news for future employment growth in these industries.


In contrast, Chart 4 shows the pattern of average hours reported by workers in the construction industry, the wholesale and retail trade industry, and the leisure and hospitality industry. For these workers, average weekly hours started to decline in the fall of 2008 and have shown no clear signs of recovery—still sitting some 3 percent to 4 percent below their prerecession averages and not trending higher. Thus, there appears to be more scope for firms in these industries to increase hours without necessarily having to hire additional workers.


This analysis does have some caveats. For one thing, it is based on worker-reported data about hours worked drawn from the BLS's Current Population Survey. An alternative would be the employer-reported measurements in the BLS's Establishment Survey.

Probably more importantly, this analysis uses the prerecession history as a guide to what is "normal." If, for example, firms decide to keep average weekly hours lower by increasing the use of part-time workers, then the fact that average hours are below prerecession levels does not imply that firms won't hire when demand increases. Some industries already make heavy use of part-time employment. For example, in May 2010 the reported average weekly hours by workers in the leisure and hospitality industry was 33.3 hours compared to 42 hours in manufacturing. Absent an offsetting increase in wage rates, a permanent shift toward increased part-time employment would lower a worker's income relative to full-time employment and probably result in an increased propensity for multiple job-holding by individuals and households.

By Amy Ellingson, economic analyst at the Atlanta Fed

June 25, 2010 in Business Cycles, Employment, Labor Markets | Permalink


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great post. informative-interesting that corporate spending has been made in the software areas. New software will make existing workers more productive, leading to more slack in the job market.

the question should be "what do you do to incent hiring?". My answer would be change tax policy to incent entrepreneurial activity-which would cause workers to form small companies to try and make profits.

Posted by: Jeff | June 30, 2010 at 11:26 AM

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