Europeans work considerably less hours than Americans
Macroeconomist Prof. Nicola Fuchs-Schündeln analyzes global differences in working behavior. She mainly attributes the fact that German wives work relatively few hours to the German joint taxation scheme for married couples.
You are currently working on several publications based on a large international data set dealing with working behavior of various population segments. In one of your papers, you highlight the differences in labor supply between Europeans and Americans. What do you find?
In this research paper[1] we examine the population between 15 and 64 years of age in 18 European countries as well as the US. According to our data collected from labor force surveys, Europeans work between 16 and 19 percent fewer hours per year than Americans. In order to get further insights why this is the case, we decompose total work hours into three components: First, the employment rate, in other words, the percentage of the population that works; second, the number of work weeks per year, taking vacation time into account; and finally, the actual hours worked per work week. We find that between 30 and 50 percent of the Europe-US difference is due solely to the higher number of weeks of vacation in Europe. We also review other relevant factors and determine that the level of education plays a significant role. Southern and Eastern Europeans especially have on average lower levels of education than Americans. These lower average education levels, together with the fact that employment increases with the level of education within each country, explain another third to half of the difference.
And is labor supply similar within Europe?
No, there exist large differences in employment rates and weekly hours worked within Europe. More people are employed in Scandinavia and Western Europe than in the United States, but they work on average fewer hours per week, which is largely caused by part time employment, especially among women. This is exactly the opposite in Eastern and Southern Europe. There, the employment rate is considerably lower than in the US, but the number of hours worked per week is higher. It is an open question what causes these differences, but regulations promoting or inhibiting part-time work likely play a role.
In another study [2] you examine the differences in labor supply of married versus single people and find a lot of variation among married women.
In this paper, we focus on the core working age population aged 25 to 54, in order to rule out the influence of educational programs of varying lengths, youth unemployment, as well as early retirement programs. Comparing the work hours of different groups across countries we notice that married women behave completely differently from other groups in the same country. The correlation of hours worked of married men with hours of single men and women across countries is very high: Singles work less in countries in which married men work less when compared internationally and vice versa, suggesting that the same factors are driving their decisions. Labor supply of married women, however, is completely uncorrelated to the one of the other groups. We also find that the variance of hours worked of married women across countries is much greater than it is among other groups. Married women in Scandinavia and Eastern Europe work almost as much as they do in the United States – their difference to the US is even less than it is among men – while married women in Western and Southern Europe work considerably less.
How can these differences be explained?
We find that a large part of these variations can be attributed to differences in taxation schemes for married couples. Internationally, there are numerous variations of tax systems for married couples that range from completely separate taxation to joint taxation as it is practiced in Germany. Joint taxation means that the tax rate of one spouse depends not only on the amount of one’s own income, but also on the income of the other spouse. In the case of a progressive tax rate and a working husband, the wife pays considerably more taxes beginning with the first euro of income than she would if she were not married. The deciding factor here is not the average tax rate, but rather the marginal tax rate. Of course men and women are not taxed differently, rather primary and secondary income earners, but in the vast majority of cases this corresponds de facto to men vs. women.
The effect of this can be demonstrated best when comparing Germany, the United States, and Sweden. German and Swedish married men both work on average 15 percent fewer hours than American married men. Swedish married women however work only four percent fewer hours than American married women, while German married women work 34 percent fewer hours. The difference among the men in Europe and the US lines up well with higher average tax rates in Sweden and Germany compared to the US. However, we find that the effective marginal tax rate that a married woman faces is about the same in Sweden and the United States. Here, two effects cancel each other out: In Sweden, the taxes are higher overall than they are in the US, but, unlike in the US, spouses are taxed separately. In both countries, wives face a marginal tax rate of around 30 percent if they are married to a man who is an average earner and begin to work full time – thus, women in Sweden and the US also work similar hours. In Germany on the other hand we have both relatively high taxes and joint taxation, which results in a marginal tax rate of about 50 percent for wives. Hours worked are correspondingly much lower than for married women in Sweden and the US.
So married women in Germany face an extreme disadvantage in regard to taxes. Should that be changed?
In the end, this is a political decision. Of course there are several reasons – demographic change, a potential imminent shortage of skilled professionals, and also gender equality – in favor of increasing the incentives of women to work. According to our findings, abolishing the German joint taxation scheme would make a large difference. Based on a quantitative macro model, we calculate the impact that changing to a separate taxation system would have in various countries (see figure below). In doing so, we leave the total tax burden of married households unchanged, and adjust only the marginal tax rates of both spouses. The effect would be enormous in Germany: Married women would work 280 hours, or seven full-time weeks, more per year if they were taxed separately rather than jointly. This puts Germany along with Belgium well ahead of other countries when compared internationally. In this respect, I do think that one should consider using other means that do not distort the relative marginal tax rates of both spouses to implement financial support of families.
In another study [3] you compare the average number of hours worked in 81 countries with the corresponding average income per capita. You find immense differences here as well.
Average weekly hours worked in the richest third of countries worldwide amount to 19 hours, whereas they amount to 29 hours in the poorest third of countries. This refers to hours worked of everyone aged 15 and above, including students, retirees, and all those who do not work. Thus, people who live in a country belonging to the poorest third work 50 percent more than people in the richest third. The difference is especially large among the old, the young, and those with a low level of education.
Two thirds of the overall difference can be attributed to differences in the employment rate, in which the gap between the poorest and the middle-income countries is very large. Well-operating retirement and social security systems probably play a prominent role here. Another third of the difference is attributed to differences in weekly hours worked. Here, however, there exists hardly any difference between poor and middle-income countries, while a large gap exists between the middle and richest third. It seems that lower regular work hours only become feasible at a relatively high level of prosperity.
Do your results here bring forward a new puzzle in development economics?
The fact that there is a great deal of difference in welfare between poor and rich countries is nothing new. However, international welfare comparisons usually only refer to the gross domestic product (GDP) per capita. If one takes differences in hours worked also into account, the difference in welfare turns out to be 40 percent larger than previously assumed. Our results imply that people in poor countries are not only consumption-poor, but also leisure-poor. A second implication of our work is that if one measures labor productivity as GDP per hour worked rather than GDP per worker, differences in labor productivity between rich and poor countries increase by 20 percent. Explaining the sources of labor productivity differences across countries is a major challenge for development economics. In this regard, one could say that we do not raise a new puzzle, but the puzzle has gotten considerably bigger based on our data.
Source: UniReport 5-2016
[1] Bick, A., Brüggemann, B., Fuchs-Schündeln, N., Hours Worked in Europe and the US: New Data, New Answers, Working Paper
[2] Bick, A., Fuchs-Schündeln, N., Taxation and Labor Supply of Married Couples across Countries: A Macroeconomic Analysis
[3] Bick, A., Fuchs-Schündeln, N., Lagakos, D., How Do Average Hours Worked Vary with Development? Cross-Country Evidence and Implications