Counting the hours

OECD Observer

Europeans, particularly women, generally work fewer hours than their US counterparts. How does this difference help explain the transatlantic gap in incomes?

“Are Europeans lazy or Americans crazy?” This provocative saying was cited by Jørgen Elmeskov, acting head of the OECD Economics Department, at a recent conference on Capitol Hill in Washington, DC.*

At issue was the difference in hours worked between the US and Europe. On one side are the Americans, with their long working hours and short vacations, and a strong attachment to employment. On the other, Europeans, with their shorter hours, longer holidays and more leisurely priorities. What causes the difference, is it a problem for economies and if so, what might be done about it?

Sensitive questions indeed, and they fuel misunderstandings and disagreements on both sides, not to mention some rivalry and envy. Many analysts see the shorter working hours as a cause of the transatlantic gap in incomes, with the US in the lead and Europe lagging. Others rebuff this view by brandishing high worker productivity figures in Europe. Besides, all work and no play must surely dull US worker productivity! If there is any truth in such claims, it is this: lower labour utilisation is a key factor behind lower incomes in several European countries compared with the US. Lower employment rates can explain some of the difference, but so does a lower number of hours worked.

Consider some examples. One country that makes frequent headlines for its relatively short working week is France, not least because of its own debate about the 35-hour week. But France is not the lowest: a look at the figures shows that the Netherlands, Norway, Sweden and Denmark work even fewer hours per year on average, while Germany works only marginally more (see graph). The UK may have higher employment, but it barely clocks up more working hours per year than France or Germany, and trails well behind the OECD average.

Though Koreans easily work the most hours per year in the OECD area, the US is also well above average: in 2005 annual hours worked in the US were 15% higher than the European Union (EU15) average.

This has not always been the case though. In the mid 1970s Europeans worked significantly longer hours. It was only in the mid-1980s that hours worked in the US began to exceed those in Europe. True, US hours worked have eased back, but not as much as in Europe: in the US they fell from about 1,850 hours worked annually in the 1960s to just over 1,700 in 2004, while western Europe’s decreased from over 2,100 to 1,600 in the same period. Since the 1970s US hours have in fact been broadly stable, whereas they have fallen sharply in Ireland, Portugal, Luxembourg and France.

What actually drives international differences in working hours? In a study entitled “Explaining Differences in Hours Worked across OECD Countries”, the authors of Going for Growth look at several causes.

Some 60% of the weekly gap is caused by shorter full-time weeks, while the rest reflects more part-time work in Europe. And most of the gap in hours reflects shorter hours worked by women.

While the working week for men in full-time jobs in Europe is only marginally shorter than for US men, women in Europe work far fewer hours than their counterparts, and are more likely to hold part-time jobs. Both genders in the US work on average 41 hours a week, women a little less. In Europe, women work just over 30 hours, compared to around 38 for men.

Cultural norms may explain some of the difference, but the trends in working hours and employment participation suggest an explanation can also be found in government policies.

Consider taxation first of all. An increase in taxes is a double-edged sword for work hours. It can either increase the incentive to work more, to cover the loss of income, or push individuals towards reducing hours worked. Going for Growth shows that increased marginal tax rates (i.e. more tax owed on every extra euro earned) have negatively influenced average working hours.

However, the effect was mostly on women, as they tend to be the second earners in most households and are likely to be more affected by increases in marginal taxes. As a result, choices such as homemaking and caring for their own children become more attractive options to work.

click here for larger graph

OECD analysis suggests that a 10 percentage point reduction in personal income tax or social security contribution rates at the margin would increase weekly hours worked by women by some 3.5%, and would edge up their employment rate too. Correcting the gap in average weekly hours worked by women could, in theory, be solved by aligning marginal taxes on secondary earners more closely with those of the US. As the report emphasises, such changes would imply a weakening of the income redistribution system in Europe and may therefore be unacceptable.

Regulatory differences also drive the working hours gap. Working time regulations were typically introduced out of concerns for health, safety and well-being. Belgium and France introduced these laws also to encourage businesses to hire more people.

Due to the 1993 Working Time Directive, the working week is limited to 48 hours in EU member states, apart from the UK which opted out. Throughout the OECD region, overtime must be paid beyond 40 hours of weekly work. Only in France and Belgium is it under 40 hours. These caps account for some of the gap in working hours between the United States and Europe, particularly for men.

click here for larger graph

As for holiday and paid leave entitlements, the striking differences between Europe and the United States (including sickness and maternity) obviously explain some of the transatlantic gap in annual working hours. For instance, in the EU, minimum leave entitlement is about three and a half weeks on average, and over four in some countries. Americans tend to take around two weeks of vacation a year, some more and some less, since there is no legal minimum requirement.

Employment protection legislation and anticompetitive policies such as product market regulations also contribute to the transatlantic gap, because they marginally reduce the number of weekly hours worked by men in particular. Such rules and regulations are markedly more stringent in Europe. Stronger union bargaining power may be associated with lower weekly hours worked by men. Labour can also resist the proliferation of part-time work, which can show up in higher average weekly hours worked by women because part-time jobs are scarce.

Since total labour utilisation is an important determinant of GDP per capita, Going for Growth places a high priority on measures that remove barriers to employment and increase labour utilisation for many OECD countries. In several cases, policies to reduce impediments to raising hours worked may form part of the solution.

RJC/IM

*See www.oecdwash.org.

References

OECD (2008), Economic Policy Reforms: Going for Growth 2008, Paris.

©OECD Observer No 266, March 2008



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