Thursday, September 12, 2013

What's the difference?

People in most of Western Europe work shorter hours than people in the United States.  One plausible explanation is differences in tastes:  basically, Europeans like free time and Americans like having lots of stuff.  However, the Nobel-winning economist Edward Prescott has argued that the difference is explained by taxes and spending.  When taxes are high and the government provides a lot of benefits at little or no cost, as in most European countries, there's not much gain from each additional hour worked.  Where taxes are low and you don't get much for free, as in the US and Japan, an extra hour of work gets you more.  So people in the US and Japan work longer, not because they have different tastes, but because the incentives are different.  In a paper published in the American Economic Review, Prescott says  "my analysis finds that French and U. S. preferences are similar" and later that "French, Japanese, and U. S. workers all have similar preferences."

 This has important policy implications:  it means that rather than being a reflection of what Europeans want, low work hours are making Europeans worse off than they could be.   According to his calculations, the French would be exactly 19% better off if they adopted American rates of taxes and spending, which would lead them to work as much as Americans, which would give them extra goods that they would enjoy just as much as Americans do.  

Oddly, Prescott didn't offer any information about preferences:  he just found that a formula including tax rates helped to predicted time at work for seven countries, especially the decline in work hours in France and Germany between the 1970s and 1990s. But the predictions weren't perfect, leaving open the possibility that something else (like preferences) might also be involved.  The World Values Survey of 1981 asked people whether various possible changes in society would be good or bad.  One was "decrease in the importance of work in our lives."  Here is a graph showing the relationship between average opinions on that question (higher values mean approval) and actual changes in work hours.

Here's a graph showing the relationship between the changes predicted from Prescott's formula and the actual changes.  

Change in work hours seems to be more strongly related to preferences than to the tax/consumption formula, and a regression analysis confirms this.  With just seven cases, neither one has a statistically significant effect, so a skeptic might say we can't be sure that either one makes a difference.  But at least we can definitely reaffirm common sense:   Americans, French, and Japanese don't have similar preference about work and leisure.   

The WVS included a number of other countries, so I'll show their rankings, from most to least positive views of "a decrease in the importance of work."

(West) Germany
South Africa


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