WHY do people in some countries work more hours? The most common explanations have to do with labour regulations and taxes, but anyone who travels frequently will notice that work and leisure are valued differently in different places. If this sounds like prejudice, consider the findings of two US-based economists in a new working paper for the National Bureau of Economic Research.
In that paper, Naci Mocan and Luiza Pogorelova of Louisiana State University, show that among European nations, a “culture of leisure” is an important determinant of how much people work.
In 2004, Edward Prescott, who was awarded the Nobel prize that year, showed that the higher the effective marginal tax rate on labour income – that is, the share of each next dollar earned that the government chooses to redistribute – the fewer hours people put in.
Importantly, the tax rate in this equation includes the employer’s part, and companies, too, are less interested in getting more work out of people if they have to give up more of the resulting income.
Resulting income
The finding was unexpected even to Prescott himself. “I am surprised,” he wrote, “that virtually all the large differences between the US labour supply and those of Germany and France are due to differences in tax systems. I expected institutional constraints on the operation of labour markets and the nature of the unemployment benefit system to be of major importance.”
Because of its simplicity, Prescott’s conclusion has often been challenged. Olivier Blanchard, the chief economist of the International Monetary Fund, wrote a paper in 2006 showing that the tax theory didn’t always explain labour supply variations: There was too much complexity.
Mocan and Pogorelova’s work focuses on the differences among European countries, based on recent statistics from the Organisation for Economic Co-operation and Development, and they confirm the link between tax rates and work. For example, Belgians, burdened with a marginal tax rate of 57 percent, worked an average of 989 hours in 2012; the Portuguese, with a 41 percent tax rate, worked 1 237 hours.
The researchers, however, managed to isolate something else in the complex web of motives that determines how much people work: Attitudes towards work and leisure. To do so, they used an ingenious device: a sample of 7 000 second-generation immigrants living and working in 26 European countries. These people are in the same tax and regulatory environments as native-born workers, but they are likely to be “infected” with their parents’ attitudes towards work and leisure, imported from their home countries.
Cultural attitudes
Mocan and Pogorelova relied on the data from the World Values Survey and the European Values Study, which has asked people in many countries about these attitudes over the years, with questions such as: “Indicate how important leisure time is in your life”; “Do you agree with the statement: People who won’t work turn lazy?”; “Do you agree that work should always come first even if it means less spare time”.
Comparing the difference in these attitudes and the difference in hours worked between the second-generation immigrants and the native-born workers, Mocan and Pogorelova found a statistically valid relationship between “leisure cultures” and the hours people put in at work.
For example, if Belgians’ taste for leisure was brought down to the level of the Portuguese, the number of hours worked in Belgium would increase by 4 percent. “Leisure culture” has a smaller effect than taxes on people’s desire to work more than taxes, in part because the effect varies significantly for men and women, Mocan and Pogorelova determined.
Mocan and Pogorelova’s findings add a dimension to the way policymakers should approach growth. Giving people tax incentives to work more will probably help, but only until these incentives run into cultural obstacles. The number of hours worked will stop growing at some point simply because people value their leisure too much. Then, the economy can only grow faster if the population increases, if workers become more productive, or both.
In countries such as France, Denmark, the Netherlands and Belgium, economic growth is naturally slower because of the cultural constraint. That’s fine: Going faster would hardly make people happier. – Bloomberg