TCS Daily


Reality of the Leisure Class

By Constantin Gurdgiev - May 16, 2006 12:00 AM

Andrew Carnegie's century-old conjecture asserts that large inheritance will decrease a person's labor-force participation. The idle wealthy classes aside, a somewhat different proposition applies for the working classes: a decrease in after-tax real income through higher taxation of wages and consumption will, in general, lead to falling hours worked and less leisure time.

From the point of view of European policymakers, accustomed to chronic unemployment, it is the latter part of this proposition that presents the greatest problem. Proponents of the European social model have argued that the excessively long hours worked by Americans cannot be accepted by European workers, who are willing to sacrifice higher income for more quality leisure. This implies that the European social model, with higher taxes, more social spending and severe restrictions on work time and working conditions, yields more free time to be spent on cultural activities, education, travel, family and friends.

There is, however, one problem with this idea: it is simply not true.

The latest evidence from the US Federal Reserve Bank of Boston and the University of Chicago shows that while the length of the average work-week has been nearly steady in the US over the last four decades, the leisure time available to the American workers has risen even faster. According to the study's authors, Mark Aguiar and Erik Hurst,

"...between 1965 and 2003 leisure for men increased by 6-8 hours per week (driven by a decline in market work hours) and for women by 4-8 hours per week (driven by a decline in home production work hours). This increase in leisure corresponds to roughly an additional 5 to 10 weeks of vacation per year, assuming a 40-hour work week. We also find that leisure increased during the last 40 years for a number of sub-samples of the population, with less-educated adults experiencing the largest increases."

Thus, for women, paid working hours are getting longer; for men, they are falling. But unpaid working hours in household services, for both men and women, have been falling even faster. Thus, total work hours declined and leisure increased.

The second point made in the above quote is even more revealing. Apparently, it is the lower-educated, lower-income groups that are seeing the greatest expansion in leisure time. If the European Social Engineers are right and more leisure leads to a more meaningful and more satisfying life, the American model implies that the greatest beneficiaries of more flexible labor markets are the poor. This does make European complaints about increasing income inequality in the US somewhat fallacious.

Another myth is that Americans work more than Europeans. By now, a wealth of studies have found very little difference in work and leisure times between American and European employees, once one takes into the account the hours spent working in household production of trivial home services.

A January 2003 study from IZA-Berlin compared Americans and Germans and found that "...overall working time is very similar on both sides of the Atlantic. Americans spend more time on market work but Germans invest more in household production." According to the authors "...these differences in the allocation of time can be explained by differences in the tax-wedge and wage differentials."

The tax-wedge is a measure of tax burden that combines income tax, employment tax and consumption taxes to assess the overall effect of government levies on household income.

Ronald Schettkat of Utrecht University confirms that "...when time in household production is included, overall working time is very similar on both sides of the Atlantic" and shows that American men work almost exactly the same hours, paid and unpaid, as German men, while American women work actually 1.5 hours a week less than their German counterparts.

Conny Olovson of Stockholm University conducted a comparative analysis of the effects of tax regimes in Sweden and the US on labor market decisions by the households. The study found that while "market work per person is roughly 10% higher in the US than in Sweden, including home production on the side of work hours reduces the difference to approximately 1%". Just as before, higher labor and consumption taxes were responsible for the majority of the observed differences in the household decision to purchase or to supply home services using their own labor.

There is more to the story of the different labor markets found across the Atlantic than the simple home vs. firm production hours story told so far suggests. Thomas Sargent and Lars Ljungqvist in their 1997 paper show that the persistently high unemployment that plagued the European economies since the 1970s can be attributed to a large extent to the "welfare states' diminished ability to cope with more turbulent economic times, such as the ongoing restructuring from manufacturing to the service industry, adoption of new technologies and a rapidly changing international economy". Furthermore, the authors show that the European Social Welfare states' approach to the labor markets regulations is conducive to cumulative losses of skills in the economies with high unemployment rates.

According to the 2004 study by Stephen Nickel of the London School of Economics, "Comparing ... France, Germany and Italy with the United States, the difference in the tax wedge (around 16 percentage points) would explain ...around one quarter of the overall difference in the employment rate." The remainder can be attributed to other Social Welfare state features of the European model including the substantial differences in the social security systems and labor market institutions. Omitting Italy from consideration, Edward Prescott shows that the effective marginal tax on labor income accounts for most of the differences in labor supply across the Atlantic.

Finally, using the data for the OECD economies, Steven Davis of the University of Chicago and Magnus Henrekson of the University of Stockholm showed that during the mid 1990s "a tax rate difference of 12.8 percentage points was associated with 122 fewer market work hours per adult per year, a drop of 4.9 percentage points in the employment-population ratio, and a rise in the shadow economy equal to 3.8 percent of GDP. It also leads to 10 to 30 percent lower employment and value added shares in (a) retail trade and repairs, (b) eating, drinking and lodging, and (c) a broader industry group that includes wholesale and motor trade." To put this into perspective, the current tax wedge between the US and the EU15 stands at 18 percent.

All of this evidence does not bode well for the European model. While generating lower incomes than the US-styled approach to labor markets regulations and taxation, the so-called socially caring Welfare States of Europe effectively imprison large percentage of their population in perpetual unemployment. As the unemployed lose skills due to jobs absence, those in paid employment are forced by higher taxation of their income and consumption to waste their time off work on largely unproductive activities such as house work and DIY.

Less regulation and more flexibility in the labor markets, coupled with lower taxation of income and consumption, delivers in reality what the European model only promises in theory.

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7 Comments

Don't accept premise
A woman working an hour longer at her job but then buying dinner at Boston Market and spending an hour making dinner at home with family aren't the same thing.

I have noticed that the higher taxes are, the more DIY activities there are. Sometimes these activities are useful and interesting projects, but in the big picture its lost efficiency and less goods are produced by the economy.

A penny saved is 2 pennies earned because you already paid taxes on it.
If I mow my own lawn I avoid using my after tax money (a penny saved is as good 2 pennies earned because you already paid taxes on it) and having it taxed again as income to whomever mows my lawn.

Soem do opt for less hours and less income this leads to greater difference in wealth/income
It is intuitive that as fewer work hours are needed to pay for the very basics of housing, clothing and food that more and more people would opt for lower paying jobs in better environments and or with shorter hours. Since others desire money for status one would expect to see a greater difference in wealth/income among people as society gets richer.

I have a cousin who personify’s this he had a girl friend who was willing to give him the goods without the commitment and so he choose to remain single and childless. He opted to work for low pay for low hours in retail. He enjoyed the job and it was very easy. He has lived a very good life and looked at us working so hard for little and liked his way better. He even ended up living in a nice resort area where there was little work other than low paying retail but being single his expenses where very low. His brother helped him buy a house and he is doing very well on very little income thank you.




economy
Money saved in DIY projects is spent elsewhere. No loss to the economy.

Not all home labor savings are in take out food. One recent example is the microwave. Going back a little further we have dishwashers. Even further, the washer and dryer. The vacuum cleaner was a big time saver for the housewife.
For yardwork, the power lawn mower was a big improvment over the push one.

Whether it's getting home from work an hour earlier, or finishing the household chores an hour earlier, it's still more time doing what you want, not what you have to do.

a more satisfying life
'more leisure leads to a more meaningful and more satisfying life'
This statement may be true for Europeans. I believe it is less true for Americans.
Speaking of All Europeans is as dangerous as speaking for All Americans. So I'll go with the generalizations and pick and choose them just as I believe the authors of the study have done.
They had to pick and choose carefully their generalizations about European and American culture in order to come up with the bonus 5-10 weeks of vacation for Americans.
They must, for example, have looked at all hours worked and subtracted them from a 24 hour day and called that 'leisure'. Rot!
Do Europeans commute as much as Americans do? Judging by the superior public transportation system in France - including the trains from city to town and the extensive subway systems in the larger cities, I'm guessing they don't.
Since the French have one of the best universal medical care systems in the world (according to the World Health Organization), they probably don't have to carry second part-time jobs or work to make money 'under the table' or 'off the books' as many Americans do because of the high cost of insurance.
Since they can send their children on to college at free national universities, I suppose they are not working double-time to save what probably will be insufficient funds for tuition when the time comes for higher education.
Since they take a longer lunch hour than the American eating at his desk, I suppose they walk more and don't feel the need for faster and faster food (despite the presence of McDonald's, a cheap lunch usually means a fresh sandwich in France.)
I don't believe they are on a savings treadmill leading to retirement either.
The constant exhortation from financial writers and advisers on radio and TV: Americans, save yourselves! Pay your retirement first, along with your mortgage! There's nothing waiting for you - social security is not your retirement safety net (I couldn't agree more...) After you have saved enough to fund 20 years of life without health problems (!) - putting your money in mutual funds which, like the emperor's new clothes, have as much value in the future as you want to believe... Then and only then think about the nicer things in life - your kids going to college, for example.
As this scenario sinks in, Americans are presented with the answer - Long Term Care Insurance, my friend! If you can afford it and if you even qualify to buy it!
Frankly, I'm sick of the desperation, the frantic hysteria about the cost of getting old in America, the danger of losing everything to medical bills or to legal bills.
This is the fricking 'leisure' we are enjoying now? If one more person begs me for money to put uniforms on the backs of soccer kids in the public schools or some similar basic need for sports or arts or even landscaping bills, I'll scream! It seems every institution supported by my tax dollars (the school that educates the kids, the town services that plow the roads) can't handle some task because they don't have enough money and the private citizen should be making up the difference. Well, of course I can, because I've got so much damn leisure time...
And - get this - this leisure leads to a 'more meaningful life' LOL.

A Much more satisfying is within the grasp of at least 70% of Americans
Helpful Thoughts On Commuting, Healthcare, College, Investing, and France v America

Americans do spend more time commuting, alone in their cars, than Europeans. Many Americans take advantage of this time to use their cell phones, listen to talk and music radio and to recorded books that make them more relaxed; more informed voters, consumers, and educators and more able employees and entrepreneurs. And they do a lot of thinking. Americans have learned not to waste time and to make it more pleasurable and profitable.

The French may indeed have one of the best health care systems in the world. However, reliance breeds contentment. Americans are not so cursed. They know they have a failed, counterproductive healthcare system, of limited proven value and quite a few dangers - like 200,000 treatment-caused deaths per year. How many quacks, people who pretend to expertise they do not have, does it take to cause so many deaths? Thus forewarned, Americans study health issues and apply the results to themselves, enabling a 74 year old male like me to be in better and growing mental and physical health than ever with no disabilities and no medical care, and according to government tables, a life expectancy of another 23.9 years to age 98. This estimate is so against the government’s interest that I believe it likely is true.
No. You do not have to work two jobs. Just wise up and study health issues of importance to you on your own. Use a health savings account to force yourself to learn how to care for your health. Because quackery reigns supreme when it comes to heart, circulatory, and mental diseases while colossal ignorance dominates the cancer scene. Look at the results. Disabuse yourself of the idea that our healthcare system has real expertise in these areas. It is a partial, largely counterproductive expertise at best. And decidedly dangerous to your health and pocketbook for the most part.

The French do have free national universities. These are predominantly commuter colleges attended by students who live nearby and with but token dormitories. That’s good from the standpoint of reducing the effects of professorial brainwashing. But it is not conducive to attracting the best in the land to elite universities. Nor upon graduation are their jobs available. It may take 1-3 years to secure a job, and those who cannot wait emigrate-some to America.

Americans typically work part time to put themselves through college, with many working full time and taking one or two classes a semester, sometimes at night and sometimes by correspondence or online. Is it good that the government in France must pay for the college education of their citizens to get them to attend? How does this breed independence. It doesn’t. It breeds dependence, fear, and insecurity. And how fear dominates France.
America is full of high school graduates and college dropouts who have done very well as entrepreneurs and managers and who are far more alive intellectually that your typical PhD in education and, in far too many cases, our life-tenured college faculty apparatchiks.

The good thing about McDonald’s in France is that it is always open for business, serves good food and wine, is clean, convenient, modern, efficient, quick, and cheap to boot. It is upgraded by its presence in France. And it is mainly the Arab-run restaurants that provide competition when France goes on vacation. There are of course those often obscurely located but very boisterous, crowded and quick French restaurants serving reasonably priced, outstanding lunches for the Paris office workers. What a pleasure.

I think the French are indeed on a savings treadmill leading to retirement. They certainly save far more and invest far less than Americans, who save little and invest far more. The best investment vehicle is the family home and residential real estate in general. And that’s where most Americans, maybe 70% today, invest their money. The leverage or return on investment ranges from about 600% for no money down but closing costs to 30% for 10% down; 15% for 20% down; and 12% for 25% down; and that is just from the appreciation due to 3% inflation alone. Scarcity will multiply that effect. A $25,000 house I bought 1967 for $500 in closing costs on the G.I. Bill I sold in 1998 for $190,000 in proceeds after al costs. Virtually all of it was capital gains, with no taxes due since it had become a rental and I bought four 4-unnit apartment buildings at 20% down with the proceeds in a 1031 tax-free exchange. Those 20 units now produce $60,000 to $90,000 a year and rising at $14,400 per year in net rental income.

You are free to stand there idly by and do nothing but take it on the chin, or get mad as hell and do something (similar) about it: like selling the family home tax-free and investing the proceeds in residential income property.
Stop talking and acting like a fearful, security conscious Frenchman and more like a confident, courageous, entrepreneurial American. With the pile of money you will soon be making in real estate, you will have no fear of not being able to pay for the best of healthcare, or of funding a college education for your kid. It takes far less study and risk to succeed in real estate than it does in the stock market. That’s why 70% of us are into real estate. Because every 3 to 8 years you can refinance your apartments and use the proceeds to double them, just like the well informed people do.
Government has so structured the tax law so as to favor real estate above all other investments. It has replaced gold as security for the dollar; and the dollar runs the world, acting and the main medium of world exchange, bank reserves everywhere, and the preferred currency for saving and investing because of its safety. Investment real estate shelters $3,636 of income yearly for each $100,000 of value of improvements for 27.5 years, by which time the depreciation from multiplied holdings will provide much larger tax sheltering. And for married couples, $500,000 in gains on the family home when sold go untaxed. And you can do that every two years!

DO IT YOURSELF HAS ALWAYS BEEN THE AMERICAN RULE

History tells us this is the way the country was settled. It has nothing to do with taxes and everything to do with necessity and getting ahead and building wealth. I was born in 1931 when very few paid any income taxes at all. My uncle bought a build it yourself 2-car garage from Sears and put it up in our back yard. We helped my brother-in-law erect a prefabricated house n the 1950s on an acre of land (worth over $1 million today). There wasn’t a lot of work with 25% unemployment in December, 1933. My Dad did all the maintenance and repair: painting, electrical, plumbing, carpentry, yard care, etc. And the neighbors did the same. Like our Mexican immigrants today, many were looking for part time and 2d jobs. Today I do the minor plumbing, electrical, carpentry, and painting repairs; but I no longer paint the house of mow the lawn, and not because I cannot afford to have someone do it for me. It’s the America way.

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