Thursday, October 04, 2012

Simple solution for unemployment

There is lot of literature on the subject with many ifs and buts.  Most of it points to stimulus to revive the economy. Because I am not an economist, I don't have much say on their effectiveness.

But I do have a very simple solution to the problem.  Declare Friday as a holiday

How does this works? We first need to understand the reasons for unemployment.
  • Companies decide to reduce production and hence need less labor.
  • Companies don't need more people. So the students coming out of college don't get any jobs.
  • New methods of productions increase efficiency and require less people. 
Now lets assume government  declares Friday as a  holiday.

Good things that can happen:
  • Companies only have 4 days to produce whatever they were producing in five days. 
  • They need to employ more people (about 20%) to meet their weekly targets. 
  • They might need to invest more in infrastructure to ensure that they can have working space/ machines etc for 20% more people.
  • They might even decide to pay less per person from existing salaries, but they do need to invest in infrastructure and hire more people. Less paying jobs is infinitely more better than no job.
Bad things that can happen:
  • They might ask people to work more hours per day. But labor regulations and bonus for extra work might not have linear cost structure. 
  • They might reduce production further and increase prices. 
I can't completely predict what will happen, but if unemployment is caused by "excess labor", then this could be simple and cost effective way for governments to artificially reduce "excess labor" from the market. BTW instead of Friday, Monday will work too. Or if possible to enforce, 20% less working hours per week per person would also yield the same result. Actually government doesn't even needs to implement it, just declare it. Assuming 40 working hours per person, government can just announce that every 2.5% increase in unemployment will result in 1 hour less working hours per week. I am sure companies will optimize everything to find out what gives them optimal results. Who knows within a decade or two we will all work couple of hours a week ;)

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