ECON 130

Lecture 20: Growth

Work and living standards

Do rising living standards cause people to work more or less? It will be very difficult to gather and interpret data on this question. An increase in the real wage (everything else constant) will have a substitution effect that increases the labour supply, and a substitution effect that reduces the labour supply. Over time, as people get richer, they have more non-labour income, which reduces the labour supply. Over time (as they get richer), people tend to live longer, which increases the labour supply. Over time, the participation rate tends to increase; raising both the labour force and the labour supply.

Some data
Stiglitz and Walsh show the average weekly hours worked in manufacturing fell from 59 hours in 1900 to 42 hours in 2000. It is not clear if this data relates to individual workers or manufacturing positions. It might be that the number of parttime manufacturing positions has increased. The US has a higher real GDP per capita than Europe because Americans work more (productivity is roughly the same in both regions). The take-home wage rate is higher in the US due to lower taxes (and fewer social services). Surveys tend to suggest that rich people work more than poor people; the higher your wage rate, the more hours you work.

More data
It is estimated that, in 1880, the average male US household head worked 8.5 hours a day (seven days a week?), while in 1995 they worked only 4.7 hours a day. See Table 5 http://eh.net/encyclopedia/article/whaples.work.hours.us Since 2003, the US Bureau of Labor Statistics has conducted the American Time Use Survey. In 2003, a full-time male employee worked 8.72 hours on an average weekday. By 2009, this number had risen to 8.75. For these few years, at least, it appears that full-time workers did not work less. http://www.bls.gov/tus/#tables

Labour supply
The number of hours worked per week does not tend to respond too much to the real wage. A full-time job tends to be about 40 hours a week. The main impact comes from the timing of exiting and entering the labour market. When wages are high, I will be reluctant to exit the market (go overseas, have children, retire), and keen to enter (come back from overseas, having children, being retired).

An experiment
Suppose you are currently employed for 40 hours a week, at $20/hour. Suppose your employer allows to specify how many hours you will work each week (from 0 to 60 hours). At $20/hour, you choose to work 40 hours. Suppose your wage is doubled, with all other prices fixed. How many hours will you choose to work? Suppose the wage is really increased, to $20,000/hour (all other prices fixed). How may hours will you work now? My guess is you would work at least 40 hours a week for the first few months. Once you have a few million in the bank, then you will start to work less, maybe just ten hours a week.

Experiment (contd)
If the wage increases enough, I will eventually start working less. However, because I may be uncertain about how long the high wage will last for it could be a mistake I will work a lot to begin with to build up my wealth and then work less. We may see an increase in labour in the first few months, followed by a decrease. Does it make a difference if all wages rise, rather than just yours? Some people argue it is relative wages that matter, not absolute wages. If all wages double (with goods prices fixed), everyone preserves their relative position and so we may see no change in the labour supply.

Working in the USA

Average weekly hours worked in the US (non-student males, from Robert Whaples' web article)
60 58 56 54 Hours worked 52 50 48 46 44 42 40 1900

1909

1919

1929

1940 Year

1950

1960

1970

1978

Possible interpretations
In the US, from 1900 (and most likely earlier) till 1940, the average hours worked per week fell significantly. From 1940, on, hours worked have done very little, maybe even increased a bit. For a specific country, hours worked, plotted against time could very well be U-shaped; early industrial development causes hours worked to fall (and may well be connected to the political strength of the union movement), while the later development of service industries (as the country becomes richer) causes hours worked to increase a bit.

Keywords
Hours worked Hours worked per full time employee