Financial Markets Play a Role for Hours Worked
(This interview appeared in SAFE Newsletter Q1 2019)
In this interview, Nicola Fuchs-Schündeln, Professor of Macroeconomics and Development at Goethe University since 2009, talks about the relationship between working hours and income in an international comparison. Fuchs-Schündeln previously taught at Harvard and was awarded the Leibniz Prize of the German Research Foundation (Deutsche Forschungsgemeinschaft, DFG) last year.
In your work, you have focused on the relationship between working hours and income. Why has there been so little research into this so far?
For one, it is difficult to measure working hours across countries. In our study, we collected microdata sets for 80 countries that have at least 5,000 observations and are representative. For 49 of these countries, comparability is particularly high, for example because the surveys all cover the whole year. This is particularly important in poor countries: The harvest time is high season, for instance, but in other periods, there is less work to do. We separated these 49 countries into the poorest third, the middle third, and the richest third worldwide.
People in poor countries work longer than people in rich countries. What does that mean?
The difference is about 50 percent for people over the age of 15. This means that people in rich countries not only have higher welfare because they can consume more goods thanks to a higher gross domestic product but also have more leisure time. Taking this into account, the welfare gap between rich and poor countries increases by 60 percent. This was a surprise for us. There were economists who suspected that in poor countries the number of working hours was lower and that this could be one of the reasons for the poverty of these countries. The opposite is the case. The decline in working hours with the level of development can also be observed over time. There are good time-series data for the US, where the average working time per week has fallen by four hours over the past 100 years. This is consistent with the differences we see today between middle-income and rich countries. So the same pattern can also be found over time in the US. This suggests that fundamental development factors are at the root.
What are the consequences of this?
This matters for example for the measurement of labor productivity: if we measure productivity as gross domestic product per hour worked, rather than per worker, the differences between rich and poor countries are even greater than previously assumed. In rich countries, labor productivity is 17 times higher than in poor countries.
What do you know about hours worked on the individual level? Do poor people work more hours within a country than rich people?
In almost all countries, we find that people work less as hourly wages rise. However, this relationship also depends on the development stage: in the richest countries, the relationship is reversed. There, people with higher wages work more. We are dealing with an income effect and a substitution effect. Poor people work a lot to achieve a minimum level of consumption. If their hourly wages rise, the pressure to work and the number of working hours decrease – that is the income effect. The substitution effect makes work more attractive because there is more money to earn. When the country or individual gets richer, the income effect weakens. The state could also play a role. If you are poor and have low productivity, in many countries, there is nothing left to do but work hard to survive. In rich countries, the welfare state takes care of people with low productivity, i.e. there is state insurance. In the US, by the way, the relationship between individual hourly wages and working hours has again changed from negative to positive over time.
What is the significance of gender and age?
There are similar patterns across countries. On average, both men and women work more in poor countries than in rich ones. However, in all countries, men work more than women do. It is also true for all age groups that working hours are higher in poor countries than in rich ones (see figure). Nevertheless, the differences are greater for the age group in which people retire in rich countries. The same applies to younger people because they are still going to school in rich countries but are already at work in poor countries. Moreover, in poor countries, only about a quarter of the population is in employment; many are self-employed for lack of an alternative – because of a low level of education, for instance. They often live in rural areas, cultivate crops, or offer simple services, and work significantly fewer hours than employees do. In rich countries, this difference does not exist.
What could be the reason for that?
Our hypothesis is that these people do not have access to the formal labor market, nor to factor markets. They lack funding, for example for loans to grow their business and employ others. The lack of developed financial markets could mean that these people can only put their own savings into their business, and as this is usually a small amount of money, their businesses cannot grow. In these circumstances, it often does not make any sense to work longer hours. If, for example, a farmer has only a small field and can’t borrow money, he will only be able to profitably work a certain number of hours there. We know that poor people work more if they are given capital. Financial markets also play a role in the number of hours worked.
Do you think that digitalization will further reduce the number of hours worked?
John Maynard Keynes once predicted that, 100 years from the time of writing, people would hardly work anymore. He was wrong about that. Although the number of hours worked has fallen, the curve of decline is flattening out; I do not think digitalization will drive us out of the market. However, it could be that progress will allow us to consume more, including more leisure time.
Could factors such as culture also be significant for the differences between countries?
I do not think cultural differences are the main reason for the fundamental differences in working hours. However, they can play a role. For example, there are signaling effects: If everyone around me is working a lot, I will also spend many hours in the office in order to send a positive signal – no matter how productive this is. I do not think, however, that such factors can explain the big differences between poor and rich countries.
Recently, you received an ERC Consolidator Grant that enables new research projects. What are the questions which you will pursue?
We want to understand better where differences in the labor market come from. Why do people behave differently in the labor market? Moreover, why do we sometimes see different labor market successes, even when people behave similarly? We will be analyzing the situation in poor and rich countries and the differences in labor market behavior and outcomes between men and women. With regard to the latter, we analyze the consequences of maternity leave and maternity policies, among other things. The European countries, in particular, have relatively farreaching maternity protection and parental leave regulations. These can have unintended effects, for example in making it more risky or costly for employers to employ women. The question is how great these unintended effects are, and whether there could be better policies to increase equal opportunities. This is important because it is not about abstract employment effects, but about people’s wellbeing. Labor income, influenced by behavior and success in the labor market, is probably the most important source of inequality in society.
Bick. A., Fuchs-Schündeln, N. and D. Lagakos (2018), “How Do Hours Worked Vary with Income? Cross-Country Evidence and Implications”, American Economic Review, Vol. 108, Issue 1, pp. 170-199.