Workers in the UK and USA work much longer hours per year than those in France and Germany. This has partly to do with the number of days paid holiday per year, partly with the number of hours worked per day and partly with the number of days worked per week.
According to the latest OECD figures, in 2017 average hours worked per year ranged from 2257 in Mexico (the OECD’s highest) to 1780 in the USA, 1710 in Japan, 1681 in the UK, 1514 in France, 1408 in Denmark and 1356 in Germany (the OECD’s lowest). Annual working hours have been falling in most countries across the decades, as the chart shows. However, in most countries the process has slowed in recent years and in the UK, the USA and France working hours have begun to rise. (Click here for a PowerPoint of the chart.)
But why do working hours differ so much from country to country? How do they relate to productivity? How do they relate to human happiness and welfare more generally?
Causes of the differences
There are various reasons for the differences in hours worked between countries.
In a situation where individual workers can choose how many hours to work, they have to decide the best trade off for them between income and leisure. As wages rise over time, there will be substitution and income effects of these extra hourly wages. Higher wages make work more valuable in terms of what people can buy from an extra hour’s work. There is thus an incentive to substitute work for leisure and hence work longer. This is the substitution effect. On the other hand, higher wages allow people to work fewer hours for a given income. This is the income effect.
As incomes rise, generally the substitution effect will tend to decline relative to the income effect. This is because of the diminishing marginal utility of income. Richer people will tend to value a given rise in income less than poorer people and therefore will value the income from extra work less than poorer people. Richer people will prefer to work fewer hours than poorer people. Generally workers in richer OECD countries work fewer hours than those in poorer OECD countries.
But this does not explain why people in the USA, Canada, Japan and the UK work longer hours than people in Germany, Denmark, Norway, The Netherlands and France.
One possible explanation for these differences is the role of trade unions. These tend to be stronger in countries with lower working hours. Reducing the working week or obtaining longer holidays is one of the key objectives of unions.
Another is income distribution. The USA, despite its high average (mean) income, has a relatively unequal distribution of income compared with Germany or France. The post-tax-and-benefits Gini coefficient in the USA is around 0.39, whereas in Germany it is 0.29, meaning that Germany has a more equal distribution of disposable income than the USA. In fact, rises in real incomes in the USA over the past 10 years have gone almost exclusively to the top 10 per cent of earners, leaving the median income little changed. In fact median household income only rose above its 2007 (pre-recession) level in 2016.
Social and cultural explanations may also be important. People in countries with higher working hours relative to hourly wages may put a greater store on consumption relative to leisure. The desire to shop may be very strong. The ‘Anglo-Saxon’ economic model pursued by right-of-centre governments in English-speaking countries, such as the USA, Canada, Australia and the UK puts emphasis on low taxes, low regulation, low public expenditure and self-advancement. Such a model encourages a more individualistic approach to work, with more emphasis on earning money.
Then there is the attitude to hours worked generally. There is a saying that in the UK the last one to leave the office is seen as the hardest working, whereas in Germany the last one to leave is seen as the least efficient. Social pressures, from colleagues, family, friends and society more generally can have a major effect on people’s choices between work and leisure.
Productivity, in terms of output per hour worked, tends to decline as workers work longer hours. People get tired and possibly bored and demotivated towards the end of a long day or week. If workers are paid by the output they produce and if productivity declines towards the end of the day, then the hourly wage would fall as the day progresses. This would act as a disincentive to work long hours. In practice, most workers are normally paid a constant rate per hour for normal-time working. For overtime, they may even be paid a higher rate, despite their likely lower productivity. This encourages them to work longer hours than if they were paid according to their marginal productivity.
Linking pay more closely to productivity could encourage people to opt for fewer hours (if they had the choice). Indeed some companies are now encouraging workers to choose their hours – which may mean fewer hours as people seek a better work–life balance. (See the BBC article below about PwC’s employment strategy.) Alternatively, some other employers adopt the system of giving workers a set amount of work to do and then they can leave work when it is finished. This acts as an incentive to work more efficiently.
It is interesting that countries where workers work more hours per year tend to have a lower output per hour worked relative to output per worker than countries where workers work fewer hours. This is illustrated in the chart opposite. The USA, with its longer working hours, has higher output per person employed than France and Germany but very similar output per hour worked.
Hours and happiness
So are people who choose to work longer hours and take home more money likely to be happier than those who choose to work fewer hours and take home less money? If people were rational and had perfect knowledge, then they would choose the balance between work and leisure that best suited them.
In practice, labour markets are highly imperfect. People often do not have choices about the amount they work; they work the hours they are told. Even if they do have a choice, they are unlikely to have perfect knowledge about the impact of long hours on their health and happiness over their lifetime. They may not even be good judges of the shorter-term effects of more work and more pay. They may believe that more money will buy them more happiness only to find soon afterwards that they are wrong.
- What factors are likely to encourage workers to work longer hours?
- Give some examples of jobs where workers have flexibility in the amount of hours they work per week and jobs where the working week is of a fixed length.
- For what reasons are annual working hours longer in the USA than in Germany?
- Would it be in employers’ interests if the government legislated so as to reduce the maximum permitted working week? Explain.
- What is meant by ‘efficiency wages’? How relevant is the concept to the issue of the average number of hours worked per year from country to country?
- Explain why people in poorer countries tend to work more hours per year than people in richer countries.
- If workers’ wages equalled their marginal revenue product, why might some workers choose to work more and others choose to work less (assuming they had a choice)?
- Are jobs in the gig economy and zero-hour contract jobs in the interests of workers?
- Is South Korea wise to cut its work limit from 68 hours a week to 52?
According to a new report, Time for Change published by the Institute for Public Policy Research (IPPR), ‘The British economic model needs fundamental reform.’
It is no longer generating rising earnings for a majority of the population, and young people today are set to be poorer than their parents. Beneath its headlines figures, the economy is suffering from deep and longstanding weaknesses, which make it unfit to face the challenges of the 2020s.
The report by the IPPR’s Commission on Economic Justice is an interim one, with the final report due in the latter part of next year. The commission was set up in 2016 and includes business leaders, such as the heads of John Lewis and Siemens, the TUC General Secretary, the Archbishop of Canterbury and other leading figures.
Commenting on the interim report, Justin Welby, the Archbishop of Canterbury said
Our economic model is broken. Britain stands at a watershed moment where we need to make fundamental choices about the sort of economy we need. We are failing those who will grow up into a world where the gap between the richest and poorest parts of the country is significant and destabilising
The report found that wages have stagnated for the majority of the population since the financial crisis of 2007/8. Wage income has fallen as a proportion of national income, while the proportions going to income from profits and property have risen. Young people are poorer than previous generations of young people.
Despite low unemployment, many people are on zero-hour contracts, part-time contracts or employed on a casual basis. For many, their jobs are insecure and they have no bargaining power.
The UK for many years has had a lower rate of investment that other developed economies and productivity, in terms of output per hour, is the lowest of its major competitors. Productivity in Germany is 36% higher than in the UK; in France and the USA it is 29% higher. Although there are some internationally competitive UK firms with high productivity, the country has:
a longer ‘tail’ of low-productivity businesses, in which weak management and poor use of skills leads to ‘bad jobs’ and low wages.
There are many other challenges, including an ageing population, uncertainties from Brexit, a large current account deficit, increased competition from abroad and growth once more in private-sector debt, which means that consumption may cease to be the main driver of economic growth as people seek to curb their borrowing.
The report is also critical of fiscal policy, which with record low interest rates could have been used to finance infrastructure projects as well as supporting public services.
The report recommends three approaches:
The first is institutional reform to support investment.
The second is making the economy more competitive through a coherent industrial strategy, reform of the financial sector to support long-term investment, reform of corporate governance to promote business success and tackling the market dominance of companies such as Amazon and Google.
The third is to bring greater social justice and equality through encouraging more secure and better-paid jobs, strengthening trades unions and reforming the tax system to make it fairer and smarter.
Not surprisingly the government has defended its record of reducing debt, presiding over falling unemployment and reduced inequality as measured by a reduced Gini coefficient. However, there has only been a modest fall in the Gini coefficient, from 0.333 in 2009/10 to 0.315 in 2016/7, and this has largely been the result of the very rich seeing a decline in income from assets.
Britain’s economy is broken and failing to tackle inequality, says major new report Independent, Ben Chu (6/9/17)
UK’s economic model is broken, says Archbishop of Canterbury The Guardian, Phillip Inman (5/9/17)
Tax wealth or see the UK tear itself apart, Cable will warn Bloomberg, Alex Morales and Thomas Penny (6/9/17)
Archbishop of Canterbury calls for radical economic reform BBC News (5/9/17)
Archbishop warns economy is “broken” as report reveals longest period of wage stagnation for 150 years Huffington Post, Rachel Wearmouth (6/9/17)
Britain’s economy is broken. We desperately need new ideas The Guardian, Tom Kibasi (4/6/17)
Carney: Britain is in the ‘first lost decade since the 1860s’, Business Insider, Oscar Williams-Grut (6/12/16)
Our broken economy, in one simple chart New York Times, David Leonhardt (7/8/16)
Time for Change: A new Vision for the British Economy IPPR Commission on Economic Justice (6/9/17)
- Why have wages for the majority of the UK population stagnated for the past 10 years?
- Why is productivity in the UK lower than in most other developed economies?
- Is it possible for poor people to become poorer and yet for the Gini coefficient to fall?
- What institutional reforms would you suggest to encourage greater investment?
- Explain the possible advantages and disadvantages of abandoning ‘austerity policy’ and adopting a more expansionist fiscal stance?
- Does it matter that Amazon and Google are dominant players in their respective markets? Explain.
In the last blog post, As UK inflation rises, so real wages begin to fall, we showed how the rise in inflation following the Brexit vote is causing real wages in the UK to fall once more, after a few months of modest rises, which were largely due to very low price inflation. But how does this compare with other OECD countries?
In an article by Rui Costa and Stephen Machin from the LSE, the authors show how, from the start of the financial crisis in 2007 to 2015 (the latest year for which figures are available), real hourly wages fell further in the UK than in all the other 27 OECD countries, except Greece (see the chart below, which is Figure 5 from their article). Indeed, only in Greece, the UK and Portugal were real wages lower in 2015 than in 2007.
The authors examine a number of aspects of real wages in the UK, including the rise in self employment, differences by age and sex, and for different percentiles in the income distribution. They also look at how family incomes have suffered less than real wages, thanks to the tax and benefit system.
The authors also look at what the different political parties have been saying about the issues during their election campaigns and what they plan to do to address the problem of falling, or only slowly rising, real wages.
Real Wages and Living Standards in the UK LSE – Centre for Economic Performance, Rui Costa and Stephen Machin (May 2017)
The Return of Falling Real Wages LSE – Centre for Economic Performance, David Blanchflower, Rui Costa and Stephen Machin (May 2017)
The chart that shows UK workers have had the worst wage performance in the OECD except Greece Independent, Ben Chu (5/6/17)
Earnings and working hours ONS
International comparisons of productivity ONS
- Why have real wages fallen more in the UK than in all OECD countries except Greece?
- Which groups have seen the biggest fall in real wages? Explain why.
- What policies are proposed by the different parties for raising real wages (a) generally; (b) for the poorest workers?
- How has UK productivity growth compared with that in other developed countries? What explanations can you offer?
- What is the relationship between productivity growth and the growth in real wages?
The UK Chancellor of the Exchequer, Philip Hammond, announced in the Budget this week that national insurance contributions (NICs) for self-employed people will rise from 9% to 11% by 2019. These are known as ‘Class 4’ NICs. The average self-employed person will pay around £240 more per year, but those on incomes over £45,000 will pay £777 more per year. Many of the people affected will be those working in the so-called ‘gig economy’. This sector has been growing rapidly in recent years and now has over 4 million people working in it.
Workers in the gig economy are self employed, but are often contracted to an employer. They are paid by the job (or ‘gig’: like musicians), rather than being paid a wage. Much of the work is temporary, although many in the gig economy, such as taxi drivers and delivery people stick with the same job. The gig economy is just one manifestation of the growing flexibility of labour markets, which have also seen a rise in temporary employment, part-time employment and zero-hour contracts.
Working in the gig economy provides a number of benefits for workers. Workers have greater flexibility in their choice of hours and many work wholly or partly from home. Many do several ‘gigs’ simultaneously, which gives variety and interest.
In terms of economic theory, this flexibility gives workers a greater opportunity to work the optimal amount of time. This optimum involves working up to the point where the marginal benefit from work, in terms of pay and enjoyment, equals the marginal cost, in terms of effort and sacrificed leisure.
For firms using people from the gig economy, it has a number of advantages. They are generally cheaper to employ, as they do not need to be paid sick pay, holiday pay or redundancy; they are not entitled to parental leave; there are no employers’ national insurance contributions to pay (which are at a rate of 13.8% for employers); the minimum wage does not apply to such workers as they are not paid a ‘wage’. Also the firm using such workers has greater flexibility in determining how much work individuals should do: it chooses the amount of service it buys in a similar way that consumers decide how much to buy.
Many of these advantages to firms are disadvantages to the workers in the gig economy. Many have little bargaining power, whereas many firms using their services do. It is not surprising then that the Chancellor’s announcement of a 2 percentage point rise in NICs for such people has met with such dismay by the people affected. They will still pay less than employed people, but they claim that this is now not enough to compensate for the lack of benefits they receive from the state or from the firms paying for their services.
Some of the workers in the gig economy can be seen as budding entrepreneurs. If you have a specialist skill, you may use working in the gig economy as the route to setting up your own business and employing other people. A self-employed plumber may set up a plumbing company; a management consultant may set up a management consultancy agency. Another criticism of the rise in Class 4 NICs is that this will discourage such budding entrepreneurs and have longer-term adverse supply-side effects on the economy.
As far as the government is concerned, there is a worry about people moving from employment to self-employment as it tends to reduce tax revenues. Not only will considerably less NIC be paid by previous employers, but the scope for tax evasion is greater in self-employment. There is thus a trade-off between the extra output and small-scale investment that self-employment might bring and the lower NIC/tax revenue for the government.
Thriving in the gig economy Philippine Daily Inquirer, Michael Baylosis (10/3/17)
6 charts that show how the ‘gig economy’ has changed Britain – and why it’s not a good thing Business Insider, Ben Moshinsky (21/2/17)
What is the ‘gig’ economy? BBC News, Bill Wilson (10/2/17)
Great Freelance, Contract and Part-Time Jobs for 2017 CareerCast (10/3/17)
We have the laws for a fairer gig economy, we just need to enforce them The Guardian, Stefan Stern (7/2/17)
The gig economy will finally have to give workers the rights they deserve Independent, Ben Chu (12/2/17)
Gig economy chiefs defend business model BBC News (22/2/17)
Spring Budget 2017 tax rise: What’s the fuss about? BBC News, Kevin Peachey (9/3/17)
Self-employed hit by national insurance hike in budget The Guardian, Simon Goodley and Heather Stewart (8/3/17)
What national insurance is – and where it goes The Conversation, Jonquil Lowe (10/3/17)
Britain’s tax raid on gig economy misses the mark Reuters, Carol Ryan (9/3/17)
Economics collides with politics in Philip Hammond’s budget The Economist (9/3/17)
UK government publications
Contract types and employer responsibilities – 5. Freelancers, consultants and contractors GOV.UK
Spring Budget 2017 GOV.UK (8/3/17)
Spring Budget 2017: documents HM Treasury (8/3/17)
National Insurance contributions (NICs) HMRC and HM Treasury (8/3/17)
- Give some examples of work which is generally or frequently done in the gig economy.
- What are the advantages and disadvantages to individuals from working in the gig economy?
- What are the advantages and disadvantages to firms from using the services of people in the gig economy rather than employing people?
- In the case of employed people, both the employees and the employers have to pay NICs. Would it be fair for both such elements to be paid by self-employed people on their own income?
- Discuss ways in which the government might tax the firms which buy the services of people in the gig economy.
- How does the rise of the gig economy affect the interpretation of unemployment statistics?
- What factors could cause a substantial growth in the gig economy over the coming years?