# Unit 3 Doing the best you can: Scarcity, wellbeing, and working hours

## 3.9 Explaining our working hours: Changes over time

Industrial Revolution
A wave of technological advances and organizational changes that began in Britain in the eighteenth century; it transformed an agricultural and craft-based economy into a commercial and industrial economy.

During the year 1600, the average British worker was at work for 266 days. This statistic did not change much until the Industrial Revolution. Then, as described in Unit 2, wages began to rise, and working time rose too: to 318 days in 1870.

Meanwhile, in the US, hours of work increased for many workers who shifted from farming to industrial jobs. In 1865, the US abolished slavery, and former enslaved people used their freedom to work much less. Working hours gradually fell. Figure 3.15 shows how working time in many countries has fallen since the late nineteenth century—in some cases by more than 50%. (The UK is in both charts to aid comparison.)

The simple model we have constructed cannot tell the whole story. Remember that the ceteris paribus assumption can omit important factors (such as culture and politics): things that we have held constant in the model may vary in real life.

But we can ask whether the model provides at least part of the explanation: could the decline in working hours be a response to rising wages?

Figure 3.16 shows two points that give estimates of the average amounts of daily free time and goods per day for employees in the US in 1900 and in 2020. The slopes of the budget constraints through points A and D are the real wage (goods per hour) in 1900 and in 2020. This shows us the feasible sets of free time and goods that would have made these points possible. Then we consider the indifference curves of workers that would have led those workers to choose the hours they did. We cannot measure indifference curves directly: we must use our best guess of what the preferences of workers would have been, given the actions that they took.

How does our model explain how we got from point A to point D? You know from Figure 3.13b that the increase in wages would lead to both an income effect and a substitution effect. In this case, the income effect outweighs the substitution effect, so both free time and goods consumed per day go up. Figure 3.16 is therefore simply an application to history of the decomposition illustrated in Figure 3.13b. Work through the steps to see the income and substitution effects.

Figure 3.16 Applying the model to history: increased goods and free time in the US (1900–2020).

OECD. Average annual hours actually worked per worker. Accessed October 2021. M. Huberman and C. Minns. 2007. ‘The times they are not changin’: Days and hours of work in Old and New Worlds, 1870–2000’. Explorations in Economic History 44 (4): pp. 538–567.; OECD. Household disposable income. Accessed October 2021.

How could reasoning in this way explain the other historical data that we have?

First, consider the period before 1870 in Britain, when both working hours and wages rose:

• Income effect: At the relatively low level of consumption in the period before 1870, workers’ willingness to substitute free time for goods did not increase much when rising wages made higher consumption possible.
• Substitution effect: But they were more productive and were paid more, so each hour of work brought more rewards than before in the form of goods, which increased the incentive to work longer hours.
• Substitution effect dominated: Therefore, before 1870 the negative substitution effect (free time falls) was bigger than the positive income effect (free time rises), so work hours rose.

During the twentieth century, wages rose and working hours fell. Our model accounts for this change as follows:

• Income effect: By the late nineteenth century, workers had a higher level of consumption and valued free time relatively more—their marginal rate of substitution was higher—so the income effect of a wage rise was greater.
• Substitution effect: This worked the same way as in the period before 1870.
• Income effect now dominates: When the income effect began to outweigh the substitution effect, working time fell.

### Work over the lifetime: How much will we work in future?

The high-income economies have experienced a major transformation: the declining role of work in the course of our lifetimes. We start working at a later age, live longer after we stop working, and spend fewer hours at work during our working years. These trends are likely to continue. Robert Fogel, an economic historian, estimated total hours of work over the whole lifetime, including travel to and from work and housework. This data differs from the data we explored so far, which was for the average hours of paid work by workers—those who are doing paid work at the time.

Fogel estimated lifetime work and leisure hours in the past, and made projections for the year 2040. He defined discretionary time as 24 hours a day minus the amount we all need for biological maintenance (sleeping, eating, and personal hygiene), and calculated leisure time as discretionary time minus working time.1

He estimated that in 1880 lifetime leisure time was just a quarter of lifetime work hours. In 1995, leisure time exceeded working time over a person’s entire life. He predicted that lifetime leisure hours would be three times lifetime working hours by the year 2040. His estimates are in Figure 3.17.

We do not yet know if Fogel has overstated the future decline in working time, as Keynes once did. But he certainly is right that one of the great changes brought about by the technological revolution is the vastly reduced role of work in the life of an average person.

### Question 3.11 Choose the correct answer(s)

Figure 3.16 depicts a model of labour supply and consumption for the US in 1900 and 2020. The wage rate is shown to have increased between the two years.

Read the following statements and choose the correct option(s).

• The substitution effect corresponds to the steepening of the budget constraint. This is represented by the move from point A to point D.
• The income effect corresponds to the parallel shift in the budget constraint outwards due to the higher income. This is represented by the move from point A to C.
• With the indifference curves shown, the income effect dominates the substitution effect, leading to a reduction in the hours of work.
• If Americans had had different preferences, they might have responded to this wage rise by reducing their free time.
• The substitution effect is the pure effect of the change in the slope of the budget constraint. The movement from A to D is the combined effect of the substitution and income effects.
• The income effect is the effect of a higher income on the choice of free time, which is shown by the parallel shift outwards of the budget constraint, and therefore a move from A to C.
• With the indifference curves shown, the income effect of the wage increase is greater than the substitution effect, so overall free time increases and hours of work fall.
• With different indifference curves, the substitution effect could have dominated the income effect, leading to a reduction of free time between 1900 and 2020.

### Exercise 3.9 Scarcity and choice

1. Do our models of scarcity and choice provide a plausible explanation for the observed trends in working hours during the twentieth century?
2. Which other factors, not included in the model, might be important in explaining what has happened?
3. Remember Keynes’s prediction that working hours would fall to 15 hours per week in the century after 1930. Why do you think working hours have not changed as he expected? Have people’s preferences changed? The model focuses on the number of hours workers would choose, so do you think that many employees are now working longer than they would like?
4. In his essay, Keynes said that people have two types of economic needs or wants: absolute needs that do not depend on the situation of other fellow humans, and relative needs—which he called ‘the desire for superiority’. If relative needs became more important to us, how would they affect our choice of working hours?
1. Robert William Fogel. 2000. The Fourth Great Awakening and the Future of Egalitarianism: The Political Realignment of the 1990s and the Fate of Egalitarianism. Chicago: University of Chicago Press.