December 27th, 2008

If you are reading this on Monday, the chances are that if you are American, you are back at work; if a European, you may well be still on holiday. The most striking difference between the American and Western European economies isn’t productivity, which is similar per hour worked, but the annual number of hours worked. OECD data on annual hours worked per employed worker for 2002:

400px-Yearly_working_time.jpg(credit Wikipedia)

The annual difference between France and the USA was 431 hours, say 10 weeks. Roughly a third of this was accounted for by leave and holidays. Dixit Wikipedia :

US law does not require employers to grant any vacation or holidays and about 25% of all employees receive no vacation time or holidays. For employees that do receive vacation, 10 working days with 8 national holidays is fairly standard. Members of the US Armed Services earn a total of 30 vacation days a year, not including national holidays.

Most European workers have holiday entitlement more like those of US servicemen than US civilian workers.

The legal minimum is 4 weeks in Germany, 4.8 weeks in Britain including 8 bank holidays, and 5 in France excluding 12 bank holidays. Chinese workers get more paid leave than American ones.

So short European hours are the result of labour-market rigidities created by unions and nanny states, while the US ones reflect the beautiful workings of the free market? Up to a point, Lord Copper. The French equilibrium reflects a social consensus, and the American the distortions of asymmetric information.

A photo of two retail businesses in Lille taken last August:

Lille shops August.jpg

Both appear to be be prosperous owner-managed Mom-and-Pop operations, well sited near a metro station and the big Sunday market. In spite of the graffiti, they are not struggling. The bakery on the right is run by Frenchwomen; the bistro on the left by African immigrants. If they both close for a long summer break, it’s not mainly because of labour legislation: the owners could presumably hire temporary help and keep going if they really wanted to. I reason that it’s essentially because the low hours introduced by the Front Populaire government of 1935 (and consolidated by Vichy’s acceptance) have entered French culture so deeply that even new immigrants assimilate the norm quickly.

US culture is different: the unions are weaker and even in unionized enclaves like car manufacturing, the UAW for one has given priority to wages and benefits over hours. But even where unions are absent (WalMart) there’s no reason to think that the current situation is anywhere near a competitive equilibrium.

Joseph Stiglitz and George Akerlof earned their Nobel prizes in economics for recognizing that in the real world businesses, workers and consumers operate with imperfect and above all asymmetric information. In the labour market, they created the theory of efficiency wages. The key insight is that since employers don’t know in advance which new hires will be conscientious, and can’t fully police them once hired, they will pay wages above the market-clearing rate to secure hard work from those they do hire and keep on. Stiglitz’ seminal paper of 1984 with Carl Shapiro offered a model which generated equilibrium unemployment without any money illusion or labour-market rigidities. More – more than you want – in Stiglitz’s Nobel Prize lecture.

The corollary of the efficiency wages theory is that free markets also tend to generate excessive working hours. It will pay firms to induce their good employees to work long days, weeks, and years, by bribery, intimidation and seduction, rather than going out and hiring risky unknowns: longer hours than both sides would freely negotiate with perfect information.

I’m not exactly the first to spot this; a search in Google Scholar for “efficiency wages working hours” generates 326,000 hits. But the insight certainly hasn’t penetrated the general educated consciousness. The OECD continues to lecture European governments about “labour market rigidities”, holding up the US model without paying any attention to its particular distortions.

Since neither European regulation nor American laissez-faire can promise a priori to be near the optimum, what line should the Obama administration take?

* It should research the issue thoroughly – starting with Stiglitz and Akerlof, who are still in the phone book.

* The presumption should be that US hours are too long; intuitively, the externalities of leisure, in richer family life, stronger communities, and lower carbon emissions, must be large.

* Another presumption is that French hours are short enough. The 35 heures law of the Mitterand era is generally thought to have been a flop: it didn’t reflect any popular groundswell of opinion, caused a lot of problems in hospitals, and has been partially rolled back without major opposition.

* Existing laws and regulations that impose costs on employers for inducing long hours – especially on overtime pay – should be enforced, and loopholes closed.

* Take every opportunity to emphasize better indicators of welfare (like GDP per hour worked plus low unemployment) over worse ones (aggregate GDP).

One possible Randian objection is the possible effect on dynamism. You don’t want to stop the most creative people, the movers and shakers, from giving their best, or you are headed for Euro-stagnation!

My responses:

* Who said anything about stopping the striving geniuses? It’s a matter of equalizing private and public costs. Get these more or less straight, and people can do what they like.

* You may want Darwin to work hard – but not Tony Soprano, Bernie Madoff and the health insurance pests whose job is to deny cover to sick people. The Wall Street meltdown was created by very hard-working clever idiots. The number of people, such as the heads of large organizations, who really have to work very long hours routinely is tiny.

* Excessive work for most people distorts judgement by cutting contact with other aspects of life: the workaholic and her team, overcoming fatigue with adrenaline, caffeine and cocaine, enter a dangerous cocoon of Randian arrogance. Where it matters for our safety, say with airline pilots, we usually insist on regulated hours (but not, bizarrely, for junior hospital doctors).

* European regulation on hours has had little discernible effect on relative growth rates and innovation.

* Don’t confuse the problem of long routine hours with occasional crises. Of course Ben Bernanke has had to sleep in the office a lot over the last few months. But creating a crisis atmosphere round everyday deadlines is just bad organization.


Mark tells me that sometime RBC blogger Robert Frank made this argument in detail in 1999 (along with a Veblen argument about competitive consumption driving higher-than-optimal work hours) in his book Luxury Fever. Maybe now is a better time for the message.

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