2019 Long-term Thinking - Politics & Policy For Investment Professionals Follow us @LGIM #Fundamentals FUNDAMENTALS

Going Dutch: the prospects for and implications of a four-day working week A future in which there is less work to be done will radically reshape the economy, with important consequences for investors – including some contrarian implications for the consumer and real-estate sectors.

Chris Jeffery works as a Lara Bernard-Villeneuve strategist within LGIM’s is a Portfolio Manager asset allocation team, for the Global Bond focusing on discretionary Strategies team. fxed income and systematic risk premia strategies.

As many as one in three of you may employment in the services sector. The employment model in the see your job disappear within the Netherlands is already based course of the next decade. That is The associated economic and social around a typical working week that the alarming conclusion from one transformation will be challenging, is substantially shorter than in the of a host of recent reports warning but it does not necessarily imply a UK. A shorter working week makes that automation will wipe out bleak dystopian future. In fact, one not- the economy more productive millions of jobs.1 Just as the rise of so-obvious answer to the challenges (defned on an output per hour robotics has squeezed employment of demographic and technological basis), provides more leisure time in the manufacturing sector, change may be welcomed by those for all, and generates higher pay artifcial intelligence is set to erode affected: a four-day working week. per hour. What’s not to like?

The working week has been getting progressively THE SHRINKING WORKING WEEK shorter through the past 200 years Averaged over the course of a year, Figure 1 Figure 2 80 80 the typical British employee now 70 70 works for just 32 hours per week. 60 60 That fgure has fallen precipitously 50 50 from nearly 70 hours per week 200 40 40 years ago and 55 hours 100 years 30 30

Hours per week Hours per week ago (see fgures 1 & 2). 20 20 10 10

0 0 1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000 1818 1918 2018 Year Year Average weekly hours in the UK, adjusted for Average weekly hours in the UK, adjusted for part-time work, sickness, holidays and stoppages. part-time work, sickness, holidays and stoppages. Source: Bank of England Source: Bank of England

1 https://www.pwc.co.uk/services/economics-policy/insights/the-impact-of-automation-on-jobs.html 2019 Long-term Thinking - Politics & Policy

The key developments that have However, that includes the pro rata working week. In 1956, Richard facilitated this decrease are the effect of absence due to holiday, Nixon (hardly a darling of left-wing steady expansion of workers’ sickness and stoppages. Excluding progressives) argued that “the four- statutory rights to leisure and the those effects, the typical working day work week is inevitable”. From rise of part-time work. Collectively, week is still around 37 hours (so- 2007-2011, the US state of Utah Britons have simply opted to work called “average usual hours”). – under Republican politicians – less as they have become wealthier. redefned the working week for state We should also not think of a four- employees as Monday-Thursday. The “32 hours” headline is day working week as some distant nevertheless striking and might socialist pipedream. Even hardened The downward trend in average make us think that the four-day conservatives have discussed or hours is a phenomenon that we working week is already here. experimented with a shortened have seen across the developed world, and in some countries it has Figure 3: The Netherlands has a shorter average working week already been taken much further than the UK, but higher incomes per head than in the UK.

45 Figure 3 shows average usual hours 40 for all members2 of the European 35 Union: the typical Dutch working 30 week is just 30 hours long, with 25 50% of people working on a part- 20 time basis. 15 The Netherlands is one of the Average usual hours Average 10 UK’s closest trading partners, 5 with a similar economic structure. 0 Depending on how you measure Malta it, Dutch income per head is some Latvia France Poland Poland Ireland Austria Croatia Estonia Finland Czechia Czechia Sweden Bulgaria Bulgaria Belgium Slovakia Slovakia Hungary Hungary Slovenia Slovenia Romania Romania Denmark Germany Germany 20-25% higher than British income Netherlands

Luxembourg per head. But they achieve this by Countries United Kingdom working substantially less. Average number of usual hours in main job, 2017. Source: Eurostat

LESSONS FROM HISTORY The parallels with modern efforts to At the start of the 21st century, Until the start of the 20th century, reduce working hours are striking. At workers in the German metal a six-day working week was the the start of the 20th century, workers industry were willing to trade wage norm. The Amalgamated Clothing in the US clothing industry “were demands for progress towards Workers of America is the union willing to give up wages or postpone the 28-hour week.4 In the UK, the credited with pushing the hardest wage demands for progress towards head of the Trades Union Congress to change working practices in the the 40-hour week… primarily as stated plainly in 2018, “I believe 1920s. It is for good reason that the a way to counter the threat of that in this century, we can win a US labour movement describes technological unemployment”.3 That four-day working week”.5 itself as “the folks who brought you angst about automation and robotics the weekend”. should sound familiar.

2 At time of writing! 3 “Work Without End: Abandoning Shorter Hours for the Right to Work”, Hunnicutt (1988), Temple University Press, p.74 4 https://www.ft.com/content/e7f0490e-0b1c-11e8-8eb7-42f857ea9f09 5 https://www.economist.com/the-economist-explains/2018/09/21/why-the-weekend-isnt-longer

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IS A SHORTER WORKING WEEK Figure 4: No evidence of an increase in involuntary part-timers MASKING UNEMPLOYMENT? A shorter working week is 20 not necessarily a good thing. 18 Furloughed workers, for example, 16 fnd themselves working fewer 14 hours as a substitute for job losses during an economic downturn. In 12 general, the International Labour 10 Organization is right to remind us 8 that “non-standard employment 6 (including part-time work) poses 4 risk for workers, frms, labour 2 6 markets and society”. 0 1993 1997 2001 2005 2009 2013 2017 Notwithstanding those worries, the % of part-time workers who could not find full-time job evidence suggests that the rise of Source: ONS part-time work is overwhelmingly a voluntary phenomenon. In the UK, a full-time job. That proportion increase in involuntary part-timers just 10% of part-time workers report fuctuates with the economic cycle while average hours worked have that they are working reduced (i.e. it rises in recessions), but there been falling in the past 25 years hours because they could not fnd is no indication of a structural (see fgure 4).

Looking ahead, there are good working week and thus intentionally resource. With the total number of reasons to expect demand for part- cut the labour supply by 20% hours available to work dropping, time work to increase steadily. First, overnight. That’s a deliberately companies would compete to the demographic trends are clear: exaggerated change (not least bid up the price of that suddenly over 55s (who tend to work shorter because there are already so many precious commodity: employees’ hours) are making up a growing voluntary part-time workers), but time. share of the workforce. Second, the it is hopefully useful for thinking cultural shift to value “experiences” about the issues involved. But it is also because output per over “things” is also consistent hour (or productivity) is likely to with a shift in society’s optimal The frst-order impact would be a increase. We can argue this from work/leisure trade-off. cut in everyone’s take-home pay. frst principles. Economic output But, as almost any economist is produced by blending capital Third, and probably most important would argue, that cut in pay would and labour. Reducing the labour over the medium term, more part- be less than 20% – outside a few supply by 20% does not affect the time work is likely to be an effective sectors, people’s wages generally size of the capital stock. The capital way to combat worries about aren’t linearly linked to the specifc stock per hour worked therefore steadily increasing automation. number of hours they work. The increases, implying output and pay second-order impact is therefore per hour worked also rise. A deeper FIRST-ORDER IMPLICATIONS OF likely to be an increase in rates of capital pool and productivity “GOING DUTCH” hourly pay. Why is that? improvements are likely to drive up As a thought experiment, we can hourly rates of pay. ask what would happen if a new It is partly because labour would government mandated a four-day become a (relatively) scarce

6 http://www.ilo.org/wcmsp5/groups/public/@dgreports/@dcomm/@publ/documents/publication/wcms_534326~2.pdf

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That logic is supported by anecdotal SECOND-ORDER IMPLICATIONS But there has now been a fall evidence. In March 2018, a New OF “GOING DUTCH” in journey numbers across the Zealand company trialled a four- It is highly unlikely that a shorter core network for each of the past day working week in association working week implies a longer four years without an equivalent with the University of Auckland. traditional weekend for all. 31% of decline in the city’s population.8 To Employee engagement soared employees in the UK already report the extent that has been driven by and there was no negative impact usually working on either Saturdays shorter working weeks, the trend on the frm’s overall output.7 That’s or Sundays. The line between is likely to be persistent. As a near- consistent with the experience of weekends and the working week monopoly provider of transport part-time employees frequently is likely to become increasingly services in London, TfL can always reporting a need to “squeeze fve blurred as working hours decrease. offset the revenue impact by raising days’ work into four”. prices. That luxury is unlikely to be That has important implications for available to other organisations Dropping to a four-day working our existing infrastructure and real- facing similar trends. week is therefore likely to make the estate assets that have been built economy more productive (defned with more regular working patterns The broader point is that by output per hour), provide more in mind. infrastructure and real-estate leisure time for all, and generate projects are based on projected higher pay per hour. To take one simple example, the cashfows over multiple decades. fnancial projections of Transport Those are exactly the kinds of If it is accompanied by technological for London are predicated on assets most vulnerable to improvement and capital deepening passenger journeys increasing disruption from a move towards a due to automation, then the impact in line with London’s population. shorter working week. on total pay will be entirely offset. That is the story of the past century: Figure 5: Londoners are commuting less than they used to average hours worked have fallen, but real incomes have nonetheless 10.6 risen dramatically. A time traveller 10.4 from 1918 would have found themselves working 40% less in 10.2 2018, but earning 550% more. 10.0

Put another way, to maintain their 9.8 standard of living, they would have 9.6 to work a grand total of just four hours per week. 9.4

9.2

9.0 2010-11 2011-12 2017-18 2013-14 2014-15 2012-13 2015-16 2016-17 2018-19* TfL passenger journeys* (million per day)

*Bus, underground, DLR & tram only; 2018-19 based on the first 10 months of the financial year Source: TfL

7 https://www.4dayweek.co.nz/four-day-week-trial 8 https://www.london.gov.uk/sites/default/fles/tf_fnances_-_fnal.pdf

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On the fip-side, shorter working According to Gallup’s daily A 15-HOUR WEEK NEXT? weeks are likely to be associated monitoring of spending habits, In 1930, John Maynard Keynes with an increasing appetite for Americans typically spend around wrote an essay on the “Economic leisure services. There has been a 17% more each day at the weekend Possibilities for Our Grandchildren”. steady drift higher in the proportion than during the working week. He argued that as society became of UK household expenditures on Any shift to greater leisure time is wealthier, people would choose to services over time. There are many therefore likely to put downward spend less time working and more potential explanations for this shift, pressure on savings as income is time at leisure. A 15-hour working but more leisure time is likely to be squeezed lower and spending is week beckoned as productivity one important factor. pushed higher. improvements allowed society to produce the same output with fewer inputs. We are not quite down Figure 6: UK households are spending more on services to 15 hours per week (yet), but the trend is clear. 60% A shorter working week makes 58% the economy more productive, 56% provides more leisure time for all, 54% and generates higher pay per hour. In the words of the Dutch economist 52% Rutger Bregman, it is “the solution 50% to just about everything”.9 48% We wouldn’t go quite that far. 46% Instead, we argue that it is a 44% perfectly logical response to 1985 1990 1995 2000 2005 2010 2015 ongoing demographic and Share of services in the UK domestic consumption basket technological challenges – but does Source: ONS Consumer Trends have important implications for investors in sectors from real estate to retail. The Dutch model is one to follow. The future’s bright, the future’s orange!

9 https://thecorrespondent.com/4373/the-solution-to-just-about-everything-working-less/168119985-db3d3c10

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