The Economics of Welfare

Pigou, Arthur C.
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London: Macmillan and Co.
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4th edition.
48 of 73

Part III, Chapter XI


§ 1. THE general analysis of the two preceding chapters has an important bearing upon a problem from which it seems at first sight to be remote. This problem is to determine the comparative effects on the national dividend of the principal ways which are open to employers for meeting periods of depression. When, in consequence of lessened demand for his product, an employer finds that a continuance of output on his former scale will involve him in loss, he can accomplish the necessary reduction in any one of three ways: (1) by working full time and dismissing a part of his staff; (2) by working full time and retaining his whole staff, but rotating employment so that only a proportion (say 2/3rds) is actually at work at any one time; or (3) by working short time and putting the whole of his staff to work during the whole of the working period.


§ 2. As between the short-time plan and both the others the relevant influences are primarily technical. Resort to the short-time plan is easiest when the conditions are such that an appreciable advantage can be gained by cutting down the most expensive hours of work, those, for example, that involve extra charges for lighting and heating. But one or other of the rival plans is favoured when complete suspension of work for a little while would involve heavy costs of restarting—e.g. the relighting of blast furnaces that have been damped down.


§ 3. As between the dismissal plan and both the others the issue depends to a large extent upon how important it is to an employer to maintain a lien upon the services of the people who have so far been working for him. When the work to be done is skilled and specialised, it is often very important for him to do this.*44 Workpeople possessed of special aptitudes practically always acquire special value to the particular firms which have employed them for any length of time. This is partly because the detailed methods of different factories are different, and, therefore, workmen who have become accustomed to any given factory, particularly if the work they have to do in it is of an all-round kind, are more useful there than other similar workmen would be. It is partly also because skilled workmen often handle expensive materials or delicate machinery, and employers naturally prefer to entrust these things to men of whose qualities they have had continuing experience. Finally, among firms making certain proprietary articles, it is partly because workmen may be expected, after a time, to get an inkling of their firm's manufacturing secrets, and the firm is, therefore, unwilling to let them enter the service of its rivals.*45 Thus, "among goldsmiths and jewellers the masters share work among a permanent staff, since there are many secret and special patterns, and adjust production by overtime for short periods."*46 In like manner, employers are keenly anxious to retain a lien on the services of engine-drivers, domestic servants and specialised agricultural labourers.*47 Even when the work to be done is of such a sort that a man who has been employed before with a particular firm is not appreciably more valuable to that firm than one who has not, an employer in bad times, who knows, or hopes, that things will improve, will like to keep in touch with more men than he needs at the moment, so as to make sure that enough will be available later on. This consideration is especially likely to influence employers in industries where the fluctuations are known to be seasonal; for in these industries there is practical certainty that a full staff will be needed again shortly. It has been suggested that seasonality of this kind is partly responsible for the prevalence of the short-time method in coal-mining and in agriculture. Moreover, even when employers, if left to themselves, would tend to the dismissal method, trade unions, which naturally dislike that method because it involves them in a larger burden of unemployment benefit, sometimes sway them in favour of one or other of the rival plans.


§ 4. In this choice between the dismissal plan and the other two another very important factor is the degree of accuracy with which wages are adjusted to efficiency. When the payment normally made to inferior workers is higher relatively to their efficiency than that made to better workers, there is a strong inducement to employers to meet bad times by dispensing with the least profitable part of their staff. It is, thus, natural to find that the dismissal method is relatively dominant in time-wage industries as compared with piece-wage industries. Discussing the principal ways in which a slackness of demand is met in this country, Sir H. Llewellyn Smith once wrote: "Looking at the question broadly, we may distinguish two main methods. The first general method is by short time, or short work, for all or the majority of those employed. A good example of that is mining, in which, for the most part, the contractions do not result so much in throwing out a certain number of colliers altogether, but in the colliery working a smaller number of days per week. Another example would be the boot and shoe trade (I mean apart, for the moment, from the great factories where machinery is used, but where it is carried on on the ordinary piece-work system), in which in slack times there are not many people entirely unemployed, but a very large number of people will have a short amount of work. The second method, which applies in other industries, is not by working short time, but by throwing out of work a certain proportion of the workers, who form a fluctuating margin of unemployed. Examples of such trades are the building, engineering and shipbuilding trades. I do not mean to say there is not short time known in any of those trades, or that overtime is not worked in times of inflation; but the main method by which they adjust themselves to a change in demand is by throwing out workers or taking on more workers."*48 An examination of the industries mentioned in this passage shows that those which Sir H. Llewellyn Smith classes among the short-time industries are just those in which piece-wages predominate, while those which he classes as dismissal industries employ time-wages. It may, indeed, be thought at first glance that the engineering trade belies this rule. Though, however, this trade contains a good deal of piecework, it was until recently mainly a time-work trade, and so is no exception.*49 In like manner, it is natural to find that in Germany, where, before the war, trade unions were relatively weak, and where, partly as a consequence of this, a rigid standard rate in time-wage industries was much less effectively enforced than it was in this country, the practice of meeting slack periods by working short time, rather than by a reduction of staff, was considerably more general. "Some of the German authorities declare that the practice of short time in some industries reduces earnings by as much as one-fourth or one-third in the course of a year. It is certain that, though certain British industries, notably coal-mining and the cotton industry, resort to the system of short time, the extent to which this system operates to lower the figure of unemployed workmen in the United Kingdom is much less than in the German Empire."*50 I do not wish to stress these facts unduly. They seem, however, to illustrate the general tendency set out at the beginning of this section.


§ 5. As between rotation of hands and the two other plans the dominant fact is that the rotation method is troublesome to arrange and involves a good deal of organisation and collaboration with the workpeople. It appears to prevail among "the riverside corn porters working regularly at the Surrey docks";*51 it has been practised to some extent among the iron workers of the north of England; and it was tried, alongside of the short-time plan, in the cotton industry during a part of 1918. Yet again, as a result of negotiations with the Tailors' Trade Union, the Master Tailors' Association announced: "We fully recognise that the work ought to be fairly shared during the slack seasons (subject to certain explanations), and we urge upon our members throughout the country to carry these principles into effect."*52 But, broadly speaking, the inconvenience of this method has not permitted it to be adopted at all widely.


§ 6. The general result is that, in the main part of industry, depressions are met by either the short-time method or the dismissal method, or by a mixture of the two. Sir Sydney Chapman gives some interesting figures to illustrate the varying degrees in which different textile industries, all employing the same (namely, the piece wage) form of wage payment, have adopted the two methods respectively. Between November 1907 and November 1908 it appears that, in the cotton industry, among the firms investigated, a 13.3 contraction of output was met, to the extent of 5 per cent by reduction of staff, and to the extent of 8.3 per cent by short time; whereas, in the silk industry, an 8.1 per cent contraction of output led to a 6.2 per cent reduction of staff and 2.1 per cent short time.*53 As is well known, the method of short time is dominant in coal-mining, where it is carried out by a reduction, in times of depression, in the number of shifts worked per week; and the method of dismissal in the building, shipbuilding and engineering trades.*54 In a bill submitted to the Italian Parliament in 1921 it was proposed that, "in the event of a necessary reduction of the staff (in any concern), before dismissing hands, the hours of work must be reduced to a minimum of thirty-six hours a week with a proportionate reduction of wages."*55


§ 7. Prima facie it would seem that, from the standpoint of the national dividend, the dismissal, or reduction of staff, method is certain to be more injurious than the short-time method, not only because the fear of unemployment may tend to make workpeople spin out their jobs unduly, but also because this method reacts injuriously on the quality of those men whom it condemns to longer or shorter periods of unemployment. The most obvious way in which it does this is through the larger and more concentrated loss of individual earnings, which unemployment, as compared with short time, involves. This threatens severe privation in food, clothing and firing, not only to the men directly affected, but also to their wives and children. If pushed far enough, this privation may easily lead to a lasting physical deterioration. Nor is this all. It may also cause those who suffer from it to supply their needs by means which threaten a permanent weakening of moral fibre. Inter alia, it may lead to resort to the Poor Law; for, as is well known, the curve of pauperism in this country follows about a year behind the curve of unemployment.*56 Resort to the Poor Law, however, or to vagrancy, marks, according to some, a definite stage of descent. There is a definite line between poverty, where struggle and independence prevail, and pauperism. "Paupers are not, as a rule, unhappy. They are not ashamed; they are not keen to become independent; they are not bitter or discontented. They have passed over the line which separates poverty from pauperism."*57 Again: "The men who enter the workhouse or go on tramp, leaving their families to the Poor Law, are, as a rule, those whom adversity, combined, no doubt, with their own weaknesses, has made no longer able-bodied or respectable. Having once entered, they seldom return to industry again."*58 Sir H. Llewellyn Smith sums the matter up thus: "It is, I think, a definite induction from history and observation that, when risk falls outside certain limits as regards magnitude and calculability, when, in short, it becomes what I may call a gamblers' risk, exposure thereto not only ceases to act as a bracing tonic, but produces evil effects of a very serious kind."*59 Leroy-Beaulieu in like manner declares, and is surely right in declaring: "It is not the insufficiency of pay which constitutes, in general and apart from exceptional cases, the social evil of to-day, but the precariousness of employment."*60 Nor is it only through the sense of insecurity that harm is done. The mere fact of idleness, apart altogether from the privation by which it is normally accompanied, is likely, unless, indeed, it is mitigated by opportunities for work on land belonging to or rented by themselves,*61 to exercise a seriously deteriorating influence—an influence, too, which grows rapidly as the amount of the idleness grows—upon the economic and general efficiency of those affected by it. The Royal Commissioners on the Poor Laws have in evidence: "The enforced idleness on completion of a job naturally throws the men upon their own resources, which is, in nine cases out of ten, the nearest public-house. The frequent change from strenuous hard work to absolute indolence to men of this character naturally tends to gradual moral and physical degeneration, and ultimately the individuals become unfit for work, even when opportunity offers."*62 A large employer of labour is reported to have said: "Between 5 and 6 per cent of my skilled men are out of work just now. During the long spell of idleness any one of these men invariably deteriorates. In some cases the deterioration is very marked. The man becomes less proficient and less capable, and the universal experience of us all who have to do with large numbers of working men is that nothing has a worse effect upon the calibre of such men than long spells of idleness."*63 The Transvaal Indigency Commission report: "Unemployment is one of the most fruitful causes of indigency of a permanent and hopeless kind. However skilled a man may be, he is bound to deteriorate during a long period of unemployment. His hand loses some of its cunning and he acquires the habit of idleness. The tendency is for the unemployed to sink to the level of the unemployable."*64 There is evidence that the men who have once become casuals are not readily reconciled again to regular work.*65 Reference may also be made to the results of a recent American inquiry: "If a period of enforced idleness were a season of recuperation and rest, there would be a good side to lack of employment. But enforced idleness does not bring recuperation and rest. The search for labour is much more fatiguing than labour itself. An applicant, sitting in one of the charity offices waiting for the arrival of the agent, related his experiences while trying to get work. He would rise at 5 o'clock in the morning and walk three or four miles to some distant point, where he had heard work could be had. He went early so as to be ahead of others, and he walked because he could not afford to pay car fare. Disappointed in securing a job at the first place, he would tramp to another place miles away, only to meet with disappointment again.... As the man told his story, he drove home the truth that lack of employment means far more than simply a loss in dollars and cents; it means a drain upon the vital forces that cannot be measured in terms of money."*66 Moreover, the evil consequences of lean months are not balanced by good consequences in fat months. Indeed, it may well be that, when, as often happens, the fat months imply long hours of overtime, they will not yield any good effects to set against the evil effects of the lean months, but will themselves add further evil effects.


§ 8. It is at this point that the analysis of the two preceding chapters becomes relevant. The inference that the shorttime method of meeting depressions is always more advantageous to the national dividend than the dismissal method, to which the foregoing observations seem to lead, must not be accepted out of hand. There is an important consideration to be set on the other side. When, in the analysis just referred to, costs of movement were discussed, it was tacitly assumed that the gains from movement to be set against them were definitely determined by the economic situation, and needed no special investigation. In fact, however, this assumption is not wholly warranted. If, in a factory (or industry) employing 100 men, the demand so falls that, at the current rate of wages,—which we assume to be maintained—1/100th part less work than before is required, this state of things may be met either by short time all round to the extent of 1/100th part of normal time or by the dismissal of one man. It is plainly in the interest of the national dividend that one man should move elsewhere if the cost of movement, translated into terms of daily payment in the way described on p. 500, is less than the whole of the daily wage. If the method of dismissal rules, one man—the one who has been dismissed—will, in fact, given that he has the necessary knowledge, move elsewhere when this condition is fulfilled. But, if the method of short time (or rotation of work) rules, nobody will move unless the cost of moving, translated as above, is less than 1/100th part of the daily wage. On this side, therefore, the method of short time must be more injurious to the national dividend than the method of dismissal. When the costs of movement are so large (e.g. when it is a question of moving from one skilled industry to another), or when the depression of demand is only expected to last for so short a time, that movement would not take place on either plan, there is, indeed, nothing to set against the direct and immediate advantage of short time. But, when the conditions are such that movement would have taken place on the dismissal plan, but does not take place on the short-time plan, the national dividend so far suffers. This is more likely to happen if a single firm adopts short time to meet a depression peculiar to itself, while there is a good demand for work in other parts of the industry, than if it adopts it to meet a depression shared by other firms; for the costs obstructing movement between firms are less than those obstructing movement between industries. The above objection to the short-time plan deserves attention, but is not, of course, decisive. It is interesting to observe that an objection on exactly the same lines lies against the cotton industry's war policy of rotating such work as there was among all the workpeople and providing out-of-work pay for those "playing" from a special levy upon such employers as were working more than the normal proportion of their machinery.*67 It also holds, in some degree, against all plans of unemployment insurance; for these plans lessen the gain that a man will get if he moves to a new trade where work might be obtained.*68 This objection also, it need hardly be said, is not decisive. The difference made to movement will generally be small, while, on the other hand, many men will be saved from the grave injury which unemployment, if no provision has been made against it, may inflict. Still, the fact that the objection exists ought not to be ignored. In the very peculiar circumstances of 1921-23 in the United Kingdom, when, as it appears, the engineering and shipbuilding industries were overcrowded as a result of the movement into them during the war,*69 and the general interest required a substantial shifting of men out of them, it was of dominating importance.


§ 9. In the foregoing analysis attention has been confined to methods of dealing with manual workers that play an important part in current practice. It will not have escaped notice, however, that salaried employees in the highest posts of business and other undertakings are not dealt with in any of these ways. They are retained continuously and receive their salaries without reference to the amount of work they are called upon to do from time to time. Judges are neither dismissed nor do they receive diminished pay in periods when litigation is slack. The same thing is true of civil servants, University professors, soldiers and sailors, whether officers or men, and the principal officials in private and joint-stock businesses. Why, it is sometimes asked, should not this plan be applied also to manual workers in industry? Why should they not, when once engaged, be regarded as permanently on the strength, and, on condition of their presenting themselves for work, be paid full wages whether, in any particular period, there is much, little, or no work for them to do? It must be conceded at once that, in concerns in which the demand for labour is perfectly steady, the introduction of the permanent salary method would leave the national dividend unaffected. The men, if their wage level were rightly adjusted, would all be employed continuously at full wages anyhow. Where, however, the demand for labour is liable to vary, things would work out differently. In view of the fact that workpeople would now get wages when they were not working, the mean level of wage rates would fall, so as to keep the annual earnings of an average man at about the old level. Labour would have become a fixed charge, in the way that interest payment on capital equipment and the salaries of the higher staff are now a fixed charge; but the employer would pay in the aggregate, over good and bad times together, much the same aggregate wages as at present. On the surface, therefore, it might seem that this contemplated arrangement would differ from the present arrangement in book-keeping appearance rather than in essence. This, however, is not really so. Like resort to short time in periods of depression, but much more forcibly, it would stop workpeople from moving away from concerns that were temporarily or permanently depressed to others that were in need of labour. For the higher staff, who must be retained in these concerns in any case, this does not matter. No harm is done by typing to his place a man who will stay there anyhow. But for ordinary manual workers it does matter. Though, therefore, this plan might be applied, without injuring the national dividend, to a certain proportion of the ordinary workers that a firm employs, it could not be applied to all of them; and to apply it to some and not to others would be difficult in practice. There is more to be said for a modified arrangement which has recently been proposed. This is that manual workers should become, as it were, salaried employees, not of particular concerns, but of the whole of the industry to which they belong. When once registered to the industry, they should receive full wages on condition of presenting themselves for work at a bureau entitled to send them to any concern in the industry that has need of labour. This modified plan—which, in effect, amounts to a system of unemployment insurance by industry with a benefit equal to the full wage rate—would not interfere with movement from one firm to another within the same industry. It would, however, no less than the unmodified plan, obstruct movement from one industry to another. There would, moreover, be some technical difficulty in defining the conditions under which a man might become registered to a particular industry and those under which he should cease to be so registered. A full discussion of these matters cannot, however, be undertaken here.

Notes for this chapter

It is to be expected, therefore, that the turn-over of labour will, in general, be lower for skilled than for unskilled workers. For evidence that this is so in the United States cf. Schlichter, The Labour Turn-over, pp. 57-64. But cf. also ibid. p. 73.
Cf. Fay, Co-partnership in Industry, p. 90.
Webb, Seasonal Trades, p. 43.
Ibid. p. 23.
Third Report of the Committee on Distress from Want of Employment, Evidence, Q. 4540.
Third Report of the Committee on Distress from Want of Employment, Evidence, Q. 4541 et seq.
Report on the Cost of Living in German Towns [Cd. 4032], p. 522.
Report of the Royal Commission on the Poor Law, p. 1156, footnote.
Report on Collective Agreements, 1910, p. xxviii.
Cf. Chapman, Unemployment in Lancashire, p. 51. When a firm employs both factory workers and home workers, it is, of course, to its interest in bad times to withdraw work from home workers rather than to reduce factory work and home work equally, because it is thus enabled to keep its machinery going. It may be added that the power to treat home workers in this way indirectly checks employers from superseding home work altogether by factory work, because it enables them to face the prospect of periodic expansions without the need of erecting factories too large for the demand of ordinary times. (Cf. Vessilitsky, The Home Worker, p. 3.)
Of course, it is not meant that in these trades no short time is known. On the contrary, even when the dismissal method is adopted for contractions of work from below the normal, what is, in effect, the short-time method is always adopted to some extent for contractions from above the normal. Thus, in the engineering trade, whereas the average amount of formal short time is very small, overtime adds on the average 3¾ per cent to the normal man's working time (Cd. 2337, p. 100), and, as against overtime working, normal hours are, of course, really short time. All that is meant is that "the main method by which these industries adjust themselves to a change in demand is by throwing out workers or taking on more workers" (Llewellyn Smith, Third Report of the Committee on Distress from Unemployment, Evidence, Q. 4540).
Economic Review of the Foreign Press, July 22, 1921, p. 190.
The interval is probably partly due to resistance made possible by savings, the pawning of household goods, children's earnings, etc.; partly to the fact that a check to the inflow of pauperism will not involve a diminution of pauperism until the inflow falls below the outflow brought about by death and other causes. (Cf. Beveridge, Unemployment, p. 49.)
Hunter, Poverty, p. 3.
Beveridge, Unemployment, p. 50.
Economic Journal, 1910, p. 518.
Répartition des richesses, p. 612.
In Belgium the cheapness of workmen's tickets on the railways enables many workers to live in cottages with gradens attached to them, to the cultivation of which they turn when out of ordinary work. (Cf. Rowntree, Unemployment, p. 267.)
Quoted in the Minority Report, p. 1138. It has been abundantly proved, however, that the aggregate consumption of drink in the United Kingdom is greatest in periods of good employment, for the reason, no doubt, that good employment is usually associated with high spending power among the people generally. Cf. A. D. Webb, "The Consumption of Alcoholic Liquors in the United Kingdom" (Statistical Journal, Jan. 1913), and Carter, The Control of the Drink Trade, pp. 90-94. It does not follow, of course, that those who are actually unemployed must drink less than they did when employed.
Alden, The Unemployed, a National Question, p. 6.
Report of the Transvaal Indigency Commission, p. 120.
Some evidence before the Unskilled Labour Committee of the C.O.S. relates how an attempt to convert casual dockers into permanent hands failed through the men refusing to turn up regularly (Report, p. 183).
United States Bulletin of the Bureau of Labour, No. 79, pp. 906-7.
For an account of the work of the Cotton Control Board during the war, cf. H. D. Henderson, The Cotton Control Board. In August 1918, the rota system, which had been established in September 1917, was abolished, and it was decided that the proceeds of the special levy should, henceforward, only be used for giving out-of-work pay to men played off definitely and continuously. The Jute Control in March 1918 introduced a scheme for compensating workers dismissed owing to a decision to stop certain machinery with a view to reducing jute consumption by 10 per cent. But the compensation was specifically confined to workpeople who were not able to find other employment, and any workman who refused suitable employment without reasonable cause was to receive no further benefit (cf. Labour Gazette, 1918, p. 135). A similar condition was made in a plan adopted in Germany at about the same time for compensating workpeople whose work was stopped through shortage of coal (Labour Gazette, 1918, p. 141).
Under the British Insurance Act of 1927 an applicant for benefit may be asked to accept work, under suitable conditions, in an occupation other than his own; but naturally this is only likely to be done as a last resort.
Cf. The Third Winter of Unemployment, by Dr. Bowley and others, pp. 24-5.

Part III, Chapter XII

End of Notes

48 of 73

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