Are Working Hours a Good Recession Indicator?

   A recession is when an economy is unable to produce goods and services to its maximum potential. It usually comes after periods of high inflation. There is a general decline in overall economic activity and the GDP (Gross Domestic Product) falls for at least two consecutive quarters. Based on the eleven recessions which have occurred in the United States since 1948, economists believe that the number of hours employees work drops prior to a recession. In the 1980s, scholar Philip L Rones concluded that firms cutting the number of hours employees can work is so cyclically consistent, that working hours are one of the top major leading economic indicators of a recession. That trend continues during the course of the recession as well. When employees work fewer hours, they earn less money, and hence consumer spending decreases as a whole. That has a negative impact on the economy, which often leads to and worsens a recession. For example, during the 2007 to 2009 recession, working hours decreased by 9.9% between the fourth quarter of 2007 and the third quarter of 2009.

Figure 1: Change in Labor Productivity, Output, and Hours Worked Between 2007 and 2016

   

  Working hours have decreased between 2021 and 2023. In June 2021 the average American worked 34.8 hours per week. In July 2023, the average American works an average of 34.4 hours per week.

Figure 2: Change in Hours Worked Per Week Between June 2021 and June 2023

   Combining the above data with the fact that inflation was high earlier in 2023, the evidence seems quite strong that a recession is about to come sometime in the near future. However, economists believe that this could be a false alarm. Even though the average number of hours employees have worked in the private sector (manufacturing, construction, transportation, retail, and hospitality) has decreased, more than 452,000 people have stated that they would like to work full-time instead of part-time. In conjunction with this, the US economy has added 278,000 jobs and in May 2023, the number of layoffs decreased by fourteen percent. Furthermore, even though the inflation rate decreased in June 2023 to somewhere between three to four percent, economic activity still remains somewhat high, further decreasing the likelihood of a recession occurring in the near future.

   However,  Americans are still not completely out of the woods. Since economic activity has increased after the inflation rate went down, it is possible that the Fed may decide to increase interest rates during their July 25th to July 26th meeting. When interest rates go up, consumer spending - which is one of the most important components of economic growth - goes down. Firms respond by decreasing production, which leads to lower salaries, more layoffs, and eventually a recession. Of course, high-interest rates don't always guarantee a recession, but it could happen. 

   Based on the available data and evidence, it is safe to say that change in working hours alone cannot determine whether a recession will take place. The other factors discussed above must also be taken into consideration.

References:

WSJ, 20 July 2023, https://www.youtube.com/watch?v=9bb8s0g-cD4. Accessed 21 July 2023.

Sprague, Shawn. “What Is Labor Productivity?” U.S. Bureau of Labor Statistics, Jan. 2017, www.bls.gov/opub/btn/volume-6/below-trend-the-us-productivity-slowdown-since-the-great-recession.htm#:~:text=During%20the%20Great%20Recession%2C%20hours,the%20third%20quarter%20of%202009.

Published by Statista Research Department, and Jul 10. “Average Weekly Working Hours U.S. 2023.” Statista, 10 July 2023, www.statista.com/statistics/215643/average-weekly-working-hours-of-all-employees-in-the-us-by-month/.