Why Work?

While I agree with Charles Kenny (“Work More, Make More?” November 2012) that, given their level of prosperity, Americans could afford to take a few more days off every year, it is hard to believe that they could reduce their working hours to the French or German level without significantly impairing their standard of living.

In the early 1970s, output per worker was more than 25 percent lower in Western Europe than in the United States. Although this gap has not shrunk over the years, the underlying situation has evolved tremendously. Back in the 1970s, Europeans were working slightly more hours than Americans, but their hourly productivity was about 30 percent lower. Today, Europeans are nearly as productive as Americans thanks to technological catch-up, but as of 1996 they worked almost 25 percent less — a gap that subsequent research suggests hasn’t changed much. Thus, contrary to what Kenny argues, we can almost entirely attribute the United States’ higher GDP per capita relative to France or Germany to a difference in the number of hours worked.

Why do Europeans choose to work so much less than Americans? Research indicates that a big part of the answer, if not the whole answer, is taxes. The unprecedented expansion in the size of the welfare state across European countries over the past 40 years has led to a steady increase in the overall rate of taxation of labor income (which includes payroll, income, and consumption taxes). And high taxes along with generous social transfers reduce incentives to work. Some people respond by cutting their work hours, while others choose to stay at home for a larger fraction of their lives. Recent empirical estimates of the elasticity of labor supply (i.e., the responsiveness of the number of hours worked to changes in the net wage) suggest that the difference in tax rates across the Atlantic could easily account for the difference in the number of hours worked.

If Americans were truly concerned that they’re putting in too much time at the office — that they’re caught up in a rat race to consume more than their neighbors — then they would favor a much higher tax rate on labor income, not for redistribution purposes but rather to discourage people from working. I doubt such a proposal would be very popular.

JEAN-BAPTISTE MICHAU
Assistant Professor of Economics
École Polytechnique
Palaiseau, France

Charles Kenny replies:

Jean-Baptiste Michau notes that GDP per hour worked is similar in Europe and the United States, whereas it used to be considerably lower in Europe. He uses the economist’s all-purpose term for “stuff that isn’t capital or labor inputs” to explain that: “technological catch-up.” But one factor in the rapid relative growth of per-hour labor productivity in Europe may very well be shorter working hours themselves. I note in the article the considerable evidence that if you give people less time to produce something, they produce it faster.

That’s not to say there is no tradeoff at all. But because hours worked explains a small proportion of global income differences, Americans could afford to work less and still enjoy a high level of consumption — alongside a higher quality of life. And I’m not convinced that higher tax rates are the way to achieve that end. U.S. tax rates and working hours have both declined over the past two decades, suggesting the negative relationship between the two is weak at best. If they are negatively related, that only suggests that the best cure for America’s fiscal woes is also the cure for its addiction to work.