1. Labour Supply and Inequality Trends in the U.S.A. & elsewhere Lars Osberg Department of Economics Dalhousie University Osberg@is.dal.ca

2. Average hours of paid work per working age adult - n 1980 about same BUT n 1997 – Germany 981.9 – France 980.6, – USA 1428.5 n 1997 Differential = 8.6 hours of work per adult per week n Adding actual & unemployment differential = 7.6 hours per adult weekly

7. Inequality and Growth - Why do working hours matter ? n Interpretation of “Inequality” and “Growth” –$ income ignores utility value of non working time –if $ income trends reflect working hour changes, utility interpretation is more problematic n Causal: – Is greater inequality the incentive that drives greater labour supply ?

8. Average paid working hours per household adult n At all points in income distribution, Americans work more hours n differences in hours of work significantly smaller at top of income distribution, despite greater US incentives n In USA, relatively poor work harder for their relative poverty than elsewhere –inequality in $ understates inequality utility

11. “Big Picture” - Bell & Freeman (1994, 2000) n to explain: “American workaholicism and German love of leisure” n difference in wage inequality between the US and Germany is major reason n return to work hours = current wage + change in probability of future promotion or higher wage n Greater inequality is incentive driving greater labour supply

12. Devil in the Details n top half of hours distribution much the same –both time periods –both Germany & USA n especially prime age males (most likely group for promotion incentive) n Big increase in paid work hours of US women - NOT in Germany n German men 55-64 decreased work n Participation rate dominates

23. Inequality as Incentive to Hours n Issue is change in average hours, since 1980 US & German approx same n Paid vacation & holiday = -17% in Germany, -8% in USA in early 1990s –common entitlement cannot fit individual promotion incentives story n Should be biggest impact among prime age male workers –especially above normal hours - but same in Germany & USA –decline in USA, despite inequality increase

24. Why differences in Hours ? n 2/3 difference in 1990s due to women –big increase work hours over time in USA –Nil increase by German women Social policy incentive - 2 year stay at home mother subsidy n approx 1/6 of 1990s difference due to prime age males –mainly a participation effect n earlier retirement by German men 55-64 has cut German work hours

25. So What ? n Social policy may significantly affect extensive margin of labour supply –support for stay-at-home parenting ? –Adequacy of general income support ? n BUT for working population –Greater Wage Inequality has remarkably small impact on Hours Distribution n Work Hours do affect interpretation of “growth” & “inequality” in $ income

26. What would inequality & growth have been if all household supplied same hours ? n Standardise @ 2000 - “Living Wage” n Mean $ income increase –+ 15.5% USA; +10.4% Germany n Increase in median income –Actual USA $ = +7.9%; sim = -1.9% –Actual Germany $ = +9.3%; sim = +14.7% n Change in Gini Index –actual USA = + 10.4%; sim = + 20.1% –actual Germany = + 8.8%; sim = -10.7%

27. n Low income Americans staved off part of their decline in living standards by increasing hours of work, which also lessened measured inequality in $ n German performance in $ income understates performance in well being –for both median incomes and income inequality n Work hours matter for perception of “growth” and “inequality” Conclusion:

28. “Big Picture” - Osberg (2000) n people typically (a) work in teams (b) enjoy leisure time more in convivial company n choice of working hours by individuals has externalities, for both the marginal utility of leisure of other people and the marginal product of labour at firms n societies with stronger co-ordination mechanisms choose work hour norms which increase the returns to both leisure and work

29. Appendix A n “Nobody to Play With” n An argument that, similar to Freeman & Bell (2000) implicitly thinks of differences in average hours per person as reflecting differences between “typical” Germans & Americans n which is far from the case n but it was / is a fun model

30. Both individuals & firms have search/matching problem n Individuals - to enjoy fully leisure hours –locate compatible playmates HUGE VARIETY in leisure tastes –find time to play together n Firms - to maximize output & profit – group people with complementary skills into production teams especially important for highly specialized – synchronize work hours

31. Dual externalities to work hours n the more time that other individuals work, the harder it is for each person to find a leisure match –implication: lower marginal utility of leisure n the more time that other individuals work, the easier it is for firms to synchronize schedules – implication: higher marginal product labour n Uncoordinated Decisions + Externality –Multiple Equilibria ?? Optimality ??

32. Leisure Externalities and Labour Supply

33. Externalities at Work & Play - Skilled & Unskilled

34. Implications n one possible equilibrium - working hours relatively equal n OR working hours diverge: –rising average hours if work hours coordination breaks down –greater increases in work time at top of income distribution –+ increasing hourly wage differentials accentuates trend to rising earnings inequality n Ambiguous Social Welfare Effects of Growth in Money Income