THE EXTENSIVE MARGIN COUNTS !
6.2 W ORK MORE HOURS , NOT LESS !
We have emphasized the key role of the “extensive margin”, i.e. of the decision of the individual to participate or not in the labour market. Needless to say, this does not mean that the intensive margin is irrelevant; it is also important that proper incentives be in place for people to work many hours. Policy makers are in this respect confronted with a challenge, since the historical evolu- tion of working hours has displayed (until very recently) a clear downward trend.10 Conventional economics suggests that this is
not surprising, since it is only to be expected that the demand for leisure increases along with rising income levels. After all, many consumer goods deliver their utility only if the consumer has at his/her disposal a sufficient amount of leisure.
It is not our purpose to preach some stringent moral respon- sibility of every individual to work hard. However, we believe that the basic challenge of sustaining work incentives has not really been understood by the Nordic electorates (or politicians). There is no problem with individuals deciding freely on how much to work and how many hours of leisure to enjoy – if the price of leisure for the individual, in the form of foregone earnings, reflects the “full” cost of leisure. Yet, as we have argued, the very fabric of Nordic welfare societies is likely to distort this choice in favour of leisure. It thereby creates a potential inconsistency and a problem of (lack
Table 6.2
The activity rate, aggregate and by age groups, 2006
Activity rate (15 to 64 years) 80.6 75.2 78.8
Activity rate (15 to 24 years) 69.9 51.8 51.3
Activity rate (25 to 54 years) 88.9 87.8 89.4
Activity rate (55 to 64 years) 63.2 58.5 72.8
Denmark Finland Sweden
The activity rate = persons in the labour force as a percentage of same age total population. Source: Eurostat.
The preference for leisure increases along with rising in- come levels – which tends to reduce hours worked
The labour market: enough workers working enough?
· 111
of) sustainability, in particular when the demographic structure becomes less advantageous.Many institutions and policies in the Nordic countries dis- tort the work-leisure choice of their citizens. There is a relatively good level of social security, protection of the environment, and a well-developed urban infrastructure. Also, there are generous government subsidies for, inter alia, public transport, housing, arts and culture. These public goods or heavily subsidized services are combined with high taxes on income from work, which tilts the choice of individuals in favour of (untaxed) leisure. The large scope of collective action and public goods means that life in the Nordic societies can be relatively “pleasant” even when the individual’s market income is low. This is not just a by-product of the Nordic policy package but reflects the very aim of social and other poli- cies: extensive provision of public goods and social security are the means of insuring citizens against risks and avoiding extreme poverty.
In short, individuals are induced to work less than is desirable from a wider (societal) perspective. As taxes and some of the other causes of the distortions cannot be done away with, policy makers should use other instruments to compensate for these distortions (or to “distort” the labour supply choices of individuals in the op- posite direction). Also, it should hardly be part of Nordic policy to subsidize programmes encouraging leisure-intensive careers for individuals that have already enjoyed a publicly subsidized educa- tion. Thus, policy makers should abolish unnecessary disincentives to work, such as “free years” or other schemes that discourage working.11
Another aspect of this externality has to do with collective agreements on shorter working hours. It is sometimes quite attrac- tive for unions and employers in particular industries to agree on shorter working hours instead of higher wages and salaries. That may seem like a good idea for both the union and its counterpart. However, it should be appreciated that the agreement on shorter working hours has consequences for other workers, who go on working longer hours and pay more taxes to finance services con- sumed by all (the “common pool” problem).
High taxes and many public policies tilt the decisions of individu- als and unions away from hours worked and in favour of more leisure – without due regard to the econ- omy-wide conse- quences
Policy makers should encourage more work rather than more leisure
There is a case for centralization or co- ordination of labour market decisions on overall working hours
Thus, responsible unions should resist shorter working hours in the name of worker solidarity. We argue below that decentralized and even individual pay bargaining is appropriate in a world of mod- ern production techniques and globalization. Yet, working hours is an issue in which there is a strong case for coordination, and overall working hours should probably be dealt with and agreed mainly at a fairly centralized union-employer organizational level. Otherwise individual unions may have incentives to agree on shorter work- ing hours without due regard to the social costs. As centralized or coordinated decision making is part of the Nordic labour markets setting, the framework exists to ensure that decisions on working hours take into account their wider implications.
It is a noteworthy fact that the Nordics have been able to sustain a rather high supply of working hours even though their tax rates are quite high. This is illustrated in figure 6.1, which shows average working hours in the EU15 and the size of total tax wedges (including income taxes, social security contribu- tions and indirect taxes). Not surprisingly, there appears to be a
The Nordics work more hours, as an average for the to- tal population, than would be expected given the size of the tax wedge 900 1000 1100 1200 1300 1400 30 35 40 45 50 55 60 65 30 35 40 45 50 55 60 65
All w/o Nordics R2= 0.62
Tax wedge
Average hours worked in 2003* Aut Bel Ger Den Spa Fin Fra UK Gre Ire Ita Net Por Swe USA Figure 6.1
Tax wedge and hours worked in EU15
* Average hours worked by the working-aged population. Source: OECD.
The labour market: enough workers working enough?