My post about Paul Krugman’s loopy proposals on employment policy generated some considerable discussion about why Europeans work so much less than Americans do. Actually, there are two separate questions here:
- Why do Europeans work less than Americans?
- Who’s happier?
A few observations:
- The phenomenon is new. Thirty years ago, Europeans worked slightly more than Americans. So the right question isn’t “Why is Europe different?”. The right question is “What changed?”.
- The obvious candidate for what changed is tax policy. In the 1970’s, marginal tax rate in both Europe and America were about 40%. Over the next few decades, they stayed around 40% in America but rose all over Europe, reaching 60% in France and 65% in Italy.
- More evidence that tax rates are the culprit: Across Europe, the countries with the highest tax rates have the fewest per capita work hours.
- But taxes can’t be the whole story, and here’s why: A 20% tax increase is roughly equivalent to a 20% pay cut, and we have lots of observations on how people respond to 20% pay cuts. They work less, but they don’t work that much less.
- Here’s a more interesting story: When your after-tax wage falls by 20%, you take more time off. But when your friends’ after-tax wages fall by 20% the effect is magnified, because time off is more fun when you’ve got friends to share it with. Bob takes a slightly longer vacation because his taxes went up, and then an even longer vacation because Alice, whose taxes also went up, is available to travel with. Call it a “social multiplier” effect.
- A more likely culprit: Unions. 80% of European workers are unionized, as opposed to 20% of Americans. And while American unions have spent the past few decades fighting mostly for higher wages, European unions have fought mostly for shorter hours.
- Could union-mandated hours restrictions be good for workers? Not according to traditional theory, which says workers are best off when they can make their own choices. Some opt for long hours and big paychecks; some opt for less income and more time with their families. Let a thousand flowers bloom.
- But if the social multiplier theory is true, workers might welcome high taxes and forced vacation time. When the union says you have to work less, that’s bad for you, but when when the union says your friends have to work less, that’s good for you, because it just got a whole lot easier to organize a camping trip. On balance, maybe you should be glad for the union (or for the taxes that drove your friends to quit their jobs).
- That’s a neat theoretical possibility, but it strikes me as implausible. For one thing, even if getting your friends to take vacations improves the quality of your leisure, it also diminishes the quality of your work time. The office is less fun and more frantic when there’s nobody to hang out with around the water cooler, nobody to pitch in when you’re facing a deadline, and nobody to cover for you when you get a call from the nurse’s office at your kid’s elementary school.
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Some references: Here are Nobel laureate Ed Prescott on the effects of tax policy, Ed Glaeser, Bruce Sacerdote and Jose Scheinkman on the social multiplier and Glaeser, Sacerdote and Alberto Alesina on unions. This post is adapted from a column I wrote for Forbes.
I lived in Denmark until I was 16 and I think the multiplier effect is probably a big part of the answer, although it’s more indirect than just having more time off with other people. When the society as a whole becomes less competitive (in the type A sense), it changes the culture, to the point where it’s considered gauche to flaunt wealth or success. There’s less pressure to succeed and a smaller reward for doing so. A “good Dane” just holds a good job and does it well, but doesn’t try too hard to climb the corporate ladder or devote themselves to success.
There’s even a slang term for the Danish culture of non-competitiveness, “Jante Law”, named after a fictional town in a satirical story written by a Dane, where the town square had laws posted in it like “You must not think you are too much better than anybody else” (it loses something in the translation).
A great deal of our wealth is spent on positional assets, where people strive for status by having a better car or a nicer watch than their peers. The actual qualities of the car or watch are not really important, only the position relative to their peers. Likewise with real estate, houses in desirable areas are often limited. The important thing is to have relatively more money than others, not to increase the absolute amount of money you have.
In such cases, all parties can be better off by working less and still maintaining their relative position, but they are trapped in a prisoner’s dilemma, unable to organise a collective reduction in working hours. In this scenario, it’s possible for governments to improve the overall well-being of its citizens by mandating increased vacation time.
Does the 60% vs. 40% tax rate include the various kinds of insurance that American workers have to buy (or are ‘given’ by their employers)?
Note that much of the taxes Europeans pay go to buy goods that Americans often pay for out of their pockets, like health care and other social benefits. European mothers get paid to stay home with their babies, while American women work overtime to pay for child care.
“Could union-mandated hours restrictions be good for workers? Not according to traditional theory, which says workers are best off when they can make their own choices. Some opt for long hours and big paychecks; some opt for less income and more time with their families. Let a thousand flowers bloom.”
Except that collective bargaining allow unions to extract monopoly rents while the “traditional theory” assumes competitive labor markets. More competitive markets allow for more of the individualized work and compensation schemes people value. But monopoly rents may be big enough to compensate. A fairer question would be to compare unionized Americans with unionized Europeans. I believe that even these Americans work more hours. Could it be that their social multiplier for leisure is smaller because so few of their friends are unionized?
I would probably attribute it to the unionization.
Taxes can’t be the story, as the taxation rates in several East Coast states (and California, I believe) are higher than some European welfare states, ie- Spain. Yet the Spanish work far less.
‘In the 1970’s, marginal tax rate in both Europe and America were about 40%.’
??? The top marginal rate was 70% here in the 70s. It dropped, in three stages, in 81-83 to 50%. I remember being told, in the late 70s, by a mailman that he didn’t work overtime because he didn’t get to keep much of the extra money.
Patrick: In the 1970s, the top marginal rate on labor income never rose above 50%, and that kicked in only above an income of $200,000 (which was a lot more than $200,000 is today). The average taxpayer paid a marginal rate of about 40%.
Now there was in fact a top rate of 70% on investment income, and of course you could argue that this indirectly discouraged labor, because one reason people work is so that they can invest their earnings. So you can argue that the 70% rate might still be relevant here—but it applied to an essentially negligible fraction of the work force.
FYI, a mailman in the 1970s was not paying a high marginal tax rate, unless he was married to an investment banker… Withholding tables may have treated temporary overtime as a permanent income shift and thus increased withholding a lot. That would have maybe hampered the short term cash flow, but not the actual taxes paid.
Bruce, you seem to be suggesting that unions act as a guide to achieve an efficient outcome by forcing everyone to work less rather than everyone working more to keep up with their peers.
I think you’d find this to be pretty far from the empirical truth. While there is value to the idea of relative wealth within small social circles, it breaks down dramatically when you expand it to society as a whole and to extreme circumstances such as the situation in Detroit today. I can venture a guess what most automotive industry workers would say if you asked them how happy they are that they now have all this leisure time and are no poorer relative to the rest of their fellow industry workers.
Could it be differing views on the relative value of each?
http://www.firstthings.com/article/2008/09/003-work-and-play-15
The office is less fun and more frantic when theres nobody to
hang out with around the water cooler, nobody to pitch in when
youre facing a deadline,
Except that this is not necessarily a problem. They may have
lots of vacation, but they tend to take them at the same time.
It is widely recognized, for instance, and even mentioned in
guide books, that the Parisians are mostly on vacation come late
summer.
“80% of European workers are unionized,” That’s a joke. Or? Here’s a nice interactive graphic http://bit.ly/4FeIqk about “Trade Unions’ Decline Around the World” from the Economix Blog in the NYT. (Data taken OECD.) There’s a simple explanation for longer vacations in good old Europe: it’s people’s preference and not union pressure on firms.
Stephan: So your story is that preferences changed suddenly and dramatically all over Europe? What might have caused such a revolution in preferences?
Steve,
Paid vacation days (average working week) in Germany:
1950: 12-15 (48 hours)
1965: 17-22 (41 hours)
1975: 20-26 (40 hours)
1985: 30-31 (38 hours)
I would not call that a revolution. The above is the result of the collective bargaining between employers and unions over the years with the option to opt out for employees (unionized or not).
Although employers must grant paid vacation days, employees must not use them. And 30% don’t use the max. paid vacation days. But 70% prefer to take their 30 days off.
I don’t think there ever existed an opposite preference. Thus no revolution in preferences.