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

3.10 Application: Work hours, free time, and inequality

The previous section showed how understanding the effect of a wage increase can help us to explain what happened to working hours over the past century or more.

People might come to want to work more or fewer hours for another reason than a change in the opportunity cost of free time. We might change how much we value free time compared to how much we value the goods that our wages or salaries allow us to buy. This trade-off is important because it influences not only how many hours we will wish to work, but how we think about ‘being well off’ or ‘not having enough’. If we come to value free time more and goods less, for example, then maintaining our standard of living will be possible with a lesser amount of goods produced. Greater concern for the sustainability of our environment could account for this change in preferences.

Figure 3.15 shows that in every country for which we have data, people were working less on average by the end of the twentieth century than at the beginning. But there are important differences in the trends:

There are two diagrams. In diagram 1, the horizontal axis displays years from 1900 to 2019. The vertical axis displays annual hours of work, and ranges from 1,000 to 3,500. There are series for six countries: France, Germany, the Netherlands, Sweden, the UK, and Switzerland. In 1900, hours of work were 3,200 in France, 3,150 in Germany, 3,100 in the Netherlands, 2,700 in Switzerland, and 2,300 in Sweden and the UK. Over time, hours of work decreased in all countries, as follows. In 2019, hours of work were 1,600 in Sweden, 1,400 in the Netherlands, 1,500 in France, 1,550 in Switzerland, and 1,700 in the UK and 1,350 in Germany. In diagram 2, the horizontal axis displays years from 1900 to 2019. The vertical axis displays annual hours of work, and ranges from 1,000 to 3,500. There are series for five countries: Australia, Canada, Japan, the UK and the US. In 1900, hours of work were 3,100 in Canada, 3,000 in the US, 2,600 in the UK, and 2,400 in Australia. Data for Japan is only available from 1913, when hours of work were 2,600. Over time, hours of work decreased in all countries, as follows. In 2019, hours of work were 1,700 in Japan, Australia, and the US, 1,650 in Canada and 1,600 in the UK.

Figure 3.15 (reproduction) Annual working hours per worker (non-agricultural workers, 1870–2017).

  • In the Netherlands, work hours fell from the equivalent of 62 hours per week (for 52 weeks of the year) to less than 27 hours per week.
  • In Sweden, where work hours had also declined dramatically, there was a small increase in work hours from 1980 to 2000.
  • Work hours declined much less in the US than in most other countries—a decline of 33% compared to a decline of 58% in the Netherlands.
  • In the US, as in Sweden, there was a slight increase in work hours at the end of the last century.

Why did hours of work increase in both the US and Sweden towards the end of the last century? Perhaps Swedes and Americans came to value consumption more during these years. In other words, their preferences changed so that their MRS fell (they became more like today’s South Korean workers).

This may have occurred because in both the US and Sweden, the share of income gained by the very rich increased considerably, and the lavish consumption habits of the rich set a higher standard for everyone else. According to this explanation, Swedes and Americans were ‘keeping up with the Joneses’ and the Joneses got richer, which led everyone else to change their preferences, and placed a higher value on the goods that their wages could buy.

The key idea here is that consumption is not just a biological activity. Eating is not just nutrition. Clothing is not just keeping warm. Your home is more than four walls to keep out the weather. What we consume—the quality, quantity, and expense of what we wear, or drive, or eat—is a signal to others and to ourselves about where we stand in society compared to other people. Signalling in this way was labelled conspicuous consumption by Thorstein Veblen, and its effect on other people is known as the Veblen effect.

conspicuous consumption
The purchase of goods and services to publicly display one’s social and economic status.
Veblen effect
A negative effect on others that arises from a person’s consumption of goods such as luxury housing, clothing, or vehicles, that display or signal social status. See also: conspicuous consumption.

Our suggested explanation of the increase in working hours in both Sweden and the US is an example of this approach. Working more allows you to buy more expensive goods, and the value of this signal of your status depends on the standards of luxury consumption set by the very rich.

The US sociologist and economist Thorstein Veblen (1857–1929) coined the term conspicuous consumption in his explanation of why people of lesser means try to mimic the consumption habits of the rich.

He wrote: ‘The means of communication and the mobility of the population now expose the person to the observation of many persons who have no other means of judging his reputability than the display of goods … the present trend of the development is in the direction of heightening the utility of conspicuous consumption as compared with leisure.’

The Veblen effect: How more inequality may lead us to value goods more and free time less

How does Veblen’s concept of conspicuous consumption help us understand how working hours have changed over time and how they differ across countries? We hypothesize that the more rich people consume, the longer other people will work, so as to try to copy (as best they can) the standards of the rich. This is called a Veblen effect. As a result, we would expect people to work longer hours in countries in which the rich are especially rich, and people to work less where the rich are only modestly richer than the rest.

Figure 3.18 presents (on the vertical axis) the average annual working hours and (on the horizontal axis, using a ratio scale) the fraction of all income received by the richest 1% of households, in ten countries over the twentieth century. The figure shows that the prediction is borne out by the data: a larger share of income going to the very rich is associated with longer average working hours.

In this scatterplot, the horizontal axis shows income share of top 1%, and ranges between 2% and 32%. The vertical axis shows the average annual work hours, and ranges between 1,000 and 3,500. Data for Australia, France, Japan, Sweden, the UK, Canada, Germany, Netherlands, Switzerland, and the US is shown. In general, there is a positive relationship between the two variables.

Figure 3.18 Inequality and work hours from 1900 to 2000.

S. Y. Oh, Y. Park, and S. Bowles. 2012. ‘Veblen effects, political representation, and the reduction in working time over the 20th century’. Journal of Economic Behavior and Organization.

And it shows more: the decline in the relative incomes of the very rich in a particular country is closely associated with the decline in work hours in that country. For example, Sweden is both the most unequal and ‘longest-working’ nation (in the early years of the data set) and also among the most equal, with the most free time (in the more recent years). The countries with the greatest reduction in inequality over this period experienced the greatest drop in work hours. The Netherlands and Sweden are examples shown in the figure. The modest increase in work hours in both Sweden and the US at the end of the last century was associated with an increase in inequality in both countries.

In this model of inequality and conspicuous consumption, the luxuries consumed by the rich are not just private goods that increase their own utility: they also have a negative effect on the other members of society, by reducing their utility. In other words, luxury consumption by the rich is a ‘public bad’. And the people affected then respond in ways that generate further negative effects because they then work and consume more, which increases the use of our limited environmental resources.

In 2001, the tax authorities in Norway began posting income tax records online. As a result, anyone could find out the income of their neighbours, friends, and co-workers. Huge numbers of people accessed the site. Ricardo Perez-Truglia, an economist, studied the statistical relationship between Norwegians’ income and measures of their ‘subjective wellbeing’—happiness and life satisfaction. Higher-income people were happier and had greater life satisfaction. But after incomes became public the differences between rich and poor in subjective wellbeing became much greater: the rich became happier and the poor less happy.1

We have identified some reasons for trends in working hours. But we have missed some important parts of the story. The most important missing element for the decline in work hours in the twentieth century is that voting rights were extended to include most adults early in the century. When overworked employees got the right to vote, in virtually all countries their trade unions and political parties demanded reductions in working hours.

The combined political, cultural, and economic influences on our choices may produce some surprising trends. In our ‘Economist in action’ video, Juliet Schor, a sociologist and economist who has written about the paradox that many of the world’s wealthiest people are working more despite gains in technology, asks what this means for our quality of life, and for the environment.

Question 3.12 Choose the correct answer(s)

The figure below shows how the Veblen effect changes Karim’s indifference curves. His hourly wage is €30. If he is not affected by how much rich people consume, he chooses point E, on indifference curve IC1. But suppose he becomes aware of the lifestyle of rich people in Madrid and would like to copy it. His indifference curves change, as shown by VIC1 and VIC2.

In this diagram, the horizontal axis shows hours of free time per day, and ranges between 8 and 24. The vertical axis shows consumption spending in euros, and ranges between 0 and 600. Coordinates are (hours of free time, consumption spending). A straight line connects points (8, 480) and (24, 0). Point F has coordinates (14.3, 290) and point E has coordinates (17, 210). Both points lie on the straight line. Two parallel, downward-sloping, convex curves are shown. One is tangent to the straight line at point F and is labelled VIC2 VIC1. The other curve is labelled VIC1 VIC2 and lies below VIC2 VIC1 at all points. VIC2 crosses the straight line in two points, one of which lies at a number of hours of free time per day greater than at point E and one of which lies at a number of hours of free time per day less than at point E. Another downward-sloping, convex curve steeper than VIC1 and VIC2 is shown. This is tangent to the straight line at point E.

Based on this information, read the following statements and choose the correct option(s).

  • The Veblen effect makes Karim increase his free time and lower his consumption.
  • The Veblen effect makes Karim more willing to substitute consumption for free time.
  • Point E no longer maximizes Karim’s utility because his MRS is less than €30 at that point.
  • Karim is indifferent between D and E, because they are both tangency points.
  • It has the opposite effect: he moves from E to D, increasing consumption and lowering free time.
  • The Veblen effect flattens Karim’s indifference curves: he will now give up more free time for a unit of consumption.
  • At E, Karim’s MRT is €30, corresponding to the slope of the budget constraint. VIC1 is flatter than the budget constraint, so the MRS is less than €30. Since MRS < MRT, E does not maximize his utility.
  • He is not indifferent; his indifference curves have changed. With the original indifference curves he prefers E; with the new indifference curves he prefers D.

Exercise 3.10 The Veblen effect

Explain how the Veblen effect could account for the following research findings:

  1. Juliet Schor found that people who watch more TV save less of their income.
  2. Ricardo Perez-Truglia found that in Norway, making everyone’s incomes publicly available online increased the happiness gap between the rich and the less well off.
  1. Ricardo Perez-Truglia. 2020. ‘The Effects of Income Transparency on Well-Being: Evidence from a Natural Experiment’. American Economic Review 110 (4): pp. 1019–54.