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13 May 2022

Could a four-day week stop the next recession?

With more time and the same pay, people's spending would move away from the goods that are currently driving inflation.

By Will Dunn

When the Bank of England raised interest rates last week, it announced that it expects inflation to peak above 10 per cent this year and for the UK to move into recession. The last major recession (prior to the pandemic) led the UK to elect a government that distinguished between “strivers and skivers”, and the Conservatives are preparing for the coming recession with similar rhetoric. Rishi Sunak’s Spring Statement speech was peppered with mentions of “hard-working families”, “working people”, “universal working income” and policy that provides “a powerful incentive… to work hard”.

For the Conservative party, hard work confers moral worth. The government’s most senior ministers have long seen British workers – whom they describe as “among the worst idlers in the world” – as being at fault for our economic malaise.

It can be argued that the opposite is true, however, and that the rational economic response to the threat of recession – especially this recession ­– is to work less. Many companies are already finding that a four-day week (without any reduction in pay) improves productivity and reduces staff turnover, but there’s also a strong argument that it could mitigate or even prevent an economic contraction.

The key to understanding this is argument is the fact that the inflation we’re now experiencing is led by the cost of goods – food, clothing, cars, fuel, furniture, TVs. This is happening because during the pandemic, factories closed and shipping was disrupted, snarling up globalisation’s tangled web of supply. At the same time, demand for goods spiked as lockdowns ruled out spending on services (dining out, sports, music, museums) and left billions of people with little to do but sit around on the internet, buying goods.

Goods also take a lot of energy to produce; by some estimates the energy needed to make one iPhone is equivalent to 73 years of charging it. So the high inflation in the cost of energy – caused by pandemic disruption, but also the climate and more recently Russia’s invasion of Ukraine, among other factors – means the cost of goods is likely to stay high even as demand falls.

Coupled with a higher cost of borrowing (from rising interest rates), this will lead people to spend less, which will mean companies don’t make as much money and employ fewer people, and the economy will contract into recession.

The Bank is therefore in a trap: if it keeps interest rates low, it risks pushing inflation still higher, but if it hikes them, it risks pushing the economy into recession. What the economy needs is for the Bank or the government to somehow persuade people to spend money, but in a non-inflationary way.

The good news is that this might be possible. Giving people more time – an extra day per week, or five extra bank holidays per year – and the same amount of pay has been shown to boost spending on services rather than goods. Alfie Stirling, chief economist at the New Economics Foundation and co-author of The Case for a Four Day Week, says studies conducted in Sweden and the US found that “when you held pay constant but people got more leisure time, they tended to use that time in a way that involves spending”, and that spending is mostly on services such as “recreational activity or hospitality”.

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Less working time is “not going to reduce inflation”, says Stirling, but when the UK faces a recession, the key thing is to boost spending at the lowest possible cost in terms of inflation, and that means moving that spending away from sectors where there is high inflation (such as cars and household goods) and towards the lower-energy, lower-inflation sectors (such as culture and hospitality).

This anti-recessionary spending only happens if the money is there to stimulate the right parts of the economy, however. If working time and pay were suddenly reduced across the economy, the effect would be be “strongly disinflationary” – but it would also produce a sharp recession.

The government can’t just tell every business to implement a four-day week, but Stirling says there are straightforward policies that can have a similar effect on working time: “increasing statutory paid leave, increasing things like paid parental leave, and introducing policies like tapered retirement so people can take their retirement a bit early.”

“I think it’d be a very sensible move for the government to add an extra two, three or four bank holidays this year. It would boost spending in the economy and, very helpfully, it would also boost spending in the sectors that are suffering from inflation – in the service sector, and not in the tradeable goods sector.”

It has long been established that shorter working hours are associated with greater productivity, and the UK – where leisure time growth has been stagnant since the early 1980s, and which works some of the longest hours in Europe – is particularly exposed to this. Politicians have spent decades worrying over the “productivity puzzle”. Long hours are deleterious to the economy because they lead to poorer health, which costs the UK tens of billions per year in lost productivity alone, and far more in the cost to the NHS and social care.

It’s unlikely that a government entranced by the Puritan notion of “hard work” – employment that takes its value not from what it produces, but from the amount of a person’s time and effort it consumes – would implement such policies. But with a tight labour market and little room for movement on salaries, some businesses will begin to do so anyway.

[See also: Are the Bank of England’s inflation experts fit for purpose?]

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