Understanding Why Some Countries Work So Much Harder than Others

1. Understanding Why Some Countries Work So Much Harder than Others Stephen Nickell Nuffield College, Oxford IZA Conference Bonn, December 2008.

2. Broad Picture • Consider the total labour input (market work) per person of working age. The big three countries of Continental Europe (France, Germany, Italy) have the lowest labour input. Scandinavia (excluding Norway) is around 27% higher. The Anglo-Saxon countries plus Japan (excluding Ireland) are around 39% higher. • Around 40% of the differential between the top group and the bottom group is accounted for by differences in the employment rate, the remainder being contributed by differences in hours worked per year by the employed. • The Scandinavian group has the highest employment rate.

3. Broad Picture Continued • Most of the variation in hours worked per year by the employed is accounted for by differences in weeks worked per year, not by hours worked per week. • Using time-use data, the cross-country correlation between market work and total work is 0.55. (Note, time use data does not, typically, account adequately for vacations/holidays or short-term sickness). • Most of the variation in weeks per year is generated by differences in vacation/holidays or absences due to sickness or maternity leave.

7. Some History • Back in the early 1970s, the Anglo-Saxon Countries, the Scandinavian countries and two of the Big Three (France, Germany) all had roughly the same level of average labour inpt per capita at around 24 hours p.w. By contrast, total labour input in Italy and the Netherlands was around 20% lower. • Since then, labour input in the Anglo-Saxon countries have barely changed, in the Scandinavian countries it has fallen a little (except Norway) and in France and Germany, the fall has been substantial.

9. History: Employment Rates • In the early 1970s, the pattern of employment rates is much the same as today. Scandinavia, plus Switzerland, was and is top. Spain, Italy, Belgium were, and still are, bottom. • The Netherlands has seen a very big increase. • In every country the employment rate of women has risen, by anything from 10 to 35 pps. The employment rates of men have generally fallen.

11. History: Hours per year • In 1970, most countries had average annual hours at around 1850-1950 hours. Sweden/Norway, were, however, well below despite very buoyant labour demand. • By 2004, there had been some dramatic changes. Annual hours in France, Germany, the Netherlands fell by around 500; Norway/Japan saw falls of around 400. By contrast, in Sweden, Australia, Canada and the US, the fall was only around 100-150 hours.

13. Aspects of the Employment Picture • The employment rates of prime-age men are generally very high but there are still some striking differences in inactivity rates. Furthermore, these generally exceed unemployment rates. • There are large differences in the inactivity rates of older men, being high in Belgium, France and Italy and low in Sweden, Switzerland, Japan and New Zealand. The overall picture for older women is similar. • Inactivity rates among prime-age women are over 30% in Ireland, Italy, Spain and Japan and around 15% in Scandinavia. • Since the 1990’s, the inactivity rates of prime age women are inversely correlated with fertility rates across countries.

15. Prime Age Male Inactivity • Inactivity among prime age men is particularly high in Finland (10%), Norway (9.9%), Sweden (9.9%), UK (9%), Australia (10.9%), US (9.5%). The EU average is 7.6%. • It is striking that the high levels of inactivity in this group are in the countries with high labour input. • The majority of inactive men in this group are in this position because of sickness or disability.

17. A Closer Look at Older Men (55-64) • In most countries the employment rate of older men has declined steadily since the early 1970s. • Most of the variation in the employment rates of older men is accounted for by variations in inactivity. • With the notable exception of Italy, inactivity rates among older men across the OECD in 1971 did not exhibit much variation, with nearly all the rates lying between 10 and 25 per cent. • By 1990, the rates were much more varied, many having increased substantially. Inactivity rates among older men in Scandinavia, excluding Finland, were around 30% or below. By contrast in France and Belgium they were over 60%. • Why did this happen?

19. Inactivity among Older Men • Evidence suggests that inactivity rates among older men depend crucially on financial incentives to retire before 65. • In many countries, public sector workers have very strong financial incentives to retire prior to 65. And the numbers of these workers has been rising. • When unemployment started to rise in the 1970s, many countries introduced early retirement incentives in the mistaken belief that this would help mitigate the unemployment problem.

20. Inactivity among Older Men Continued • For example, “unemployment pensions” were introduced in 1979 in Italy at age 57+, in 1983 in Italy at age 55+ if unemployment was due to “severe” economic conditions or industrial reorganisations. In Germany in 1972 they were introduced at 60+ for those unemployed for one year. • In France, for those over 56, unemployment benefits were paid with no requirements to seek work or retrain. In Netherlands from 1972-87, receipt of disability pensions depended in part on labour market conditions. This produced incentives to “retire” early. Such incentives have been reduced in some countries in recent years.

24. A Closer Look at Prime Age Women • In most countries the employment rates of prime age women have been rising steadily since the 1970s with corresponding falls in inactivity. • Nevertheless, there remain substantial cross-country variations. Furthermore, these have nothing to do with looking after children. Across Europe, there has been a significant negative correlation between the fertility rates and the inactivity rates of prime-age women since around 1990.

26. Inactivity among Prime Age Women • So what does explain these differences? • Variations in the marginal tax rates applied to wives with working husbands at low levels of earnings, typically generated by joint versus single taxation of couples. A rise in this marginal rate from 0 to 30% raises inactivity by 5 pps. • Variations in the strictness of employment protection legislation. Strict employment protection keeps women out of the labour market. This is very important. • There is some evidence that legislative/union barriers to part-time work raise prime-age women’s inactivity.

27. Inactivity among Prime Age Women, Continued • Other factors sometimes considered include public expenditures on child care and children more generally, education, unemployment rates, numbers of children. All these factors are more or less endogenous, so it makes the interpretation of their effects rather tricky.

32. A Closer Look at Overall Unemployment Rates • Unemployment rose in all OECD countries from the 1960s to the 1980s, in many cases to relatively high levels. • In some countries, active policy changes have enabled them to reduce unemployment from high levels back to the levels of the 1970s, notably Australia, Denmark, Ireland, Netherlands, UK. • In some countries, unemployment remains at high levels, notably Belgium, France, Germany, Italy, Spain.

34. What Policy Seems to Work • Reforms of the social security system concentrating on helping individuals into work. It is important that people in the Employment Service are each responsible for specific workless individuals. Workers in the Employment Service must be very well trained and given the right incentives. They can employ a mixture of carrots and sticks. The actual level of benefits is not particularly important. • Having the right sort of wage determination system. If there is a high level of collective bargaining coverage, some degree of co-ordination of bargaining is required. High levels of coverage alongside low rates of union membership and decentralised and adversarial bargaining generally lead to high unemployment.

35. More Policies • A deregulated service sector helps to sustain high levels of labour demand. • Low levels of labour taxes and the absence of very stringent employment protection legislation are also helpful.

36. Annual Hours Worked By the Employed • Less is known than about employment rates. • Driven mainly by holidays/paid vacations and by short-term sickness and parental leave. • In most countries, minimum paid vacations are governed by legislation. • What about part-time work? • Wide variations in short-term sickness/parental leave absence, mainly due to benefits.

41. Some More Detailed Analysis • High marginal tax rates on initial earnings for spouses have a positive impact on hours, discouraging Part-Time working. • High marginal tax rates, more generally, have a negative impact on hours for obvious reasons. • Earnings dispersion has a strong positive effect on hours: i) Veblen hypothesis – the bigger the dispersion, the harder people work to emulate others. ii) Bell/Freeman – the bigger the dispersion, the more people work longer hours to signal quality, since promotion is more valuable. See also Michelacci and Pijoon-Mas (2007), CEPR, DP 6314.

43. The Distribution of Earnings • The major driving force behind the distribution of earnings is the distribution of skills. For example, the cross-country correlation of earnings dispersion with test-score dispersion (from the International Adult Literacy Survey) is over 0.8. See also Bedard/Ferrall (2003). • But unions are also important. For example, 90/10 earnings ration = 1.71+0.98 (95/5 prose literacy ratio) (4.2) N=14, R²=0.84 - 0.13 union density – 1.26 union coverage (0.2) (2.9) • Koeniger et al. (2004) find that, as well as unions, employment protection and minimum wages significantly reduce earning dispersion.

46. Some Overall Stories • Overall picture. Anglo-Saxon, high labour input sustained over last 35 years. France/Germany, labour input was high, has fallen dramatically over last 35 years. Scandinavia, high labour input, close to Anglo-Saxon, sustained over last 35 years. Netherlands, Italy, low labour input, very stable over last 35 years. • The tax story (eg. Prescott). • The tax plus all other benefits story. • The Alesina et al. story. Unions, welfare, social democracy encourage high taxes, pressure for work sharing. • None of these is complete. For example, Scandinavia has stronger unions, more generous welfare and more social democracy but no work-sharing pressure cf. France/Germany. Why not? Italy, Netherlands also do not fit easily.

47. Some Overall Stories Continued • In Scandinavia, all the social partners have, for a long time, agreed on a model of the economy focussed on international competitiveness. Note they are small open economies. • Thus, in response to adverse shocks, they correctly concentrated on wage restraint to reduce unemployment, rather than on cutting labour inputs, which they recognised would tend to impact adversely on international competitiveness and raise rather than lower unemployment. • By contrast, in France/Germany, unions and the state argued, incorrectly, that responding to adverse shocks by reducing labour inputs would prevent increases in unemployment (the work-sharing argument). This policy response did not help to reduce unemployment but did succeed in permanently reducing labour input. A good example of this may be seen in the changes in the inactivity rates of older men.

48. Italy and Netherlands: Special Stories • In the early 1970s, Italian labour input was low because retirement ages were low (60 for men, 55 for women) and only 30% of working age women worked. • Labour input still low for very similar reasons – no element of work-sharing here. Italian labour market institutions are essentially focused on preserving the position of the male head of household (eg. Minimal welfare, very strong employment protection, labour market entry very difficult). • The Netherlands also had low labour input in the early 1970s. Essentially because of exceptionally low levels of women’s employment. • Since then, there has been a huge increase in women’s employment (up from under 30% to over 65%). But also a huge increase in part-time work (up from 16% to 35%). The combination has been to keep labour input relatively low and stable. Note, part-time work is not involuntary and all the social partners have completely reversed their views on part-time work, from strongly against to strongly in favour.

49. Final Point • The most important lesson is that unregulated labour markets, low taxes and weak unions are not necessary for sustaining high levels of labour input. Having generous but work friendly benefit systems and eschewing the use of work-sharing policies in response to adverse shocks can work just as well.