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

3.12 Explaining our working hours: Differences between countries

income, disposable income
Income, also known as disposable income, is the amount of profit, interest, rent, labour earnings, and other payments (including transfers from the government) received, net of taxes paid, measured over a period of time such as a year. Your income is the maximum amount that you could consume per period and leave your wealth unchanged.

Figure 3.2 shows that in countries with higher income (GDP per capita) workers tend to have more free time, but also that there are big differences in annual hours of free time between countries with similar income levels. To analyse these differences using our model, we need a different measure of income that corresponds more closely to earnings from employment. The table in Figure 3.24 shows working hours for six countries, together with household disposable income per capita.

From these figures we have calculated annual free time, and the average wage (by dividing annual income by annual hours worked). Finally, free time per day and daily consumption are calculated by dividing annual free time and earnings by 365.

Country Average annual hours worked per employee Average annual disposable income ($, single person, no children) Average annual free time Wage ($, disposable income per hour worked) Free time per day Consumption per day ($)
US 1,767 54,854 6,993 31.04 19.16 150.28
Netherlands 1,399 39,001 7,361 27.88 20.17 106.85
Australia 1,683 42,554 7,077 25.28 19.39 116.59
South Korea 1,908 26,799 6,852 14.05 18.77 73.42
Slovak Republic 1,572 21,765 7,188 13.85 19.69 59.63
Mexico 2,124 17,384 6,636 8.18 18.18 47.63

Figure 3.24 Free time and consumption per day across countries (2020).

OECD. Average annual hours actually worked per worker. Accessed June 2022.; OECD. Household disposable income. Accessed June 2022.

Our model of the choice of working hours allows us to examine whether the differences between countries can be explained by differences in wages. If not, they must reflect differing preferences for consumption and free time. Previous sections explained how preferences may differ across countries according to the level of inequality, participation of women in the labour market, and social and cultural factors, including support for childcare.

Figure 3.25 applies the model to the data in Figure 3.24. We have plotted daily consumption and free time for a representative worker in each country, with the corresponding budget constraint constructed as in Section 3.9, using a line through (24, 0) with slope corresponding to the wage. Figure 3.24 gives us no information about the preferences of workers in each country, and we don’t know whether the combinations in the diagram can be interpreted as a choice made by the workers. But, if we assume that they do reflect the workers’ choices, we can consider what the data tells us about the preferences of workers in different countries.

Can we explain the differences in free time simply as responses to different wages? Comparing Mexico and the US, the countries with the lowest and highest wages in this group, both free time and consumption were higher in the US. It could be that Mexican and American workers have similar preferences, and Mexicans would make the same choices as Americans if their wages increased. But in South Korea and Slovakia, the wage was almost the same, and Koreans took almost an hour less free time. Our model suggests that preferences must be different in these two countries.

What can we say about Australia and the Netherlands, where wages are different? Could it be that they have the same preferences, and if their wage increased, Australians would make the same choice as Dutch workers? This seems unlikely: the substitution effect would lead them to consume more goods and take less free time, and it is implausible to suppose that the income effect of a wage rise would lead them to consume fewer goods. More plausible is the hypothesis that Dutch and Australian workers (on average) have different preferences. The steps in Figure 3.25 show some hypothetical indifference curves that could explain the difference among countries.

In this line chart, the horizontal axis displays daily hours of free time, and ranges from 14 to 24. The vertical axis displays consumption per day in dollars. Coordinates are (free time, consumption). A series of straight lines connect different points on the vertical axis with point (24, 0). These straight lines are associated with different countries each of which is marked by a specific point. From the flatter to the steeper line, these points are: Mexico (18, 50), Turkey (19, 60), South Korea (18.5, 80), the Netherlands (20, 120), and the US (19, 155). For each line, there is a downward-sloping, convex indifference curve that is tangent to that line at the labelled point. Point Q is the intersection between the indifference curves for the Netherlands and for the US, and has coordinates (20, 150).
Fullscreen
https://www.core-econ.org/microeconomics/03-scarcity-wellbeing-12-differences-between-countries.html#figure-3-25

Figure 3.25 Using the model to explain free time and consumption per day across countries (2020).

OECD. Average annual hours actually worked per worker. Accessed June 2022.; OECD. Household disposable income. Accessed June 2022.

Differences between countries: In this line chart, the horizontal axis displays daily hours of free time, and ranges from 14 to 24. The vertical axis displays consumption per day in dollars. Coordinates are (free time, consumption). A series of straight lines connect different points on the vertical axis with point (24, 0). These straight lines are associated with different countries each of which is marked by a specific point. From the flatter to the steeper line, these points are: Mexico (18, 50), Turkey (19, 60), South Korea (18.5, 80), the Netherlands (20, 120), and the US (19, 155).
Fullscreen
https://www.core-econ.org/microeconomics/03-scarcity-wellbeing-12-differences-between-countries.html#figure-3-25a

Differences between countries

We can use our model and data from Figure 3.24 to understand the differences between the countries. The solid lines show the feasible sets of free time and goods for the countries in Figure 3.24 (except the Slovak Republic (Slovakia), which has almost the same budget constraint as Korea).

OECD. Average annual hours actually worked per worker. Accessed June 2022.; OECD. Household disposable income. Accessed June 2022.

Indifference curves of workers: In this line chart, the horizontal axis displays daily hours of free time, and ranges from 14 to 24. The vertical axis displays consumption per day in dollars. Coordinates are (free time, consumption). A series of straight lines connect different points on the vertical axis with point (24, 0). These straight lines are associated with different countries each of which is marked by a specific point. From the flatter to the steeper line, these points are: Mexico (18, 50), Turkey (19, 60), South Korea (18.5, 80), the Netherlands (20, 120), and the US (19, 155). For each line, there is a downward-sloping, convex indifference curve that is tangent to that line at the labelled point.
Fullscreen
https://www.core-econ.org/microeconomics/03-scarcity-wellbeing-12-differences-between-countries.html#figure-3-25b

Indifference curves of workers

We have drawn hypothetical indifference curves for each country that could explain their choices.

OECD. Average annual hours actually worked per worker. Accessed June 2022.; OECD. Household disposable income. Accessed June 2022.

The US and the Netherlands: In this line chart, the horizontal axis displays daily hours of free time, and ranges from 14 to 24. The vertical axis displays consumption per day in dollars. Coordinates are (free time, consumption). A series of straight lines connect different points on the vertical axis with point (24, 0). These straight lines are associated with different countries each of which is marked by a specific point. From the flatter to the steeper line, these points are: Mexico (18, 50), Turkey (19, 60), South Korea (18.5, 80), the Netherlands (20, 120), and the US (19, 155). For each line, there is a downward-sloping, convex indifference curve that is tangent to that line at the labelled point. Point Q is the intersection between the indifference curves for the Netherlands and for the US, and has coordinates (20, 150).
Fullscreen
https://www.core-econ.org/microeconomics/03-scarcity-wellbeing-12-differences-between-countries.html#figure-3-25c

The US and the Netherlands

The Dutch and American indifference curves cross, at point Q. It would be very difficult to draw plausible indifference curves for these two countries that did not cross. And if their indifference curves cross, they cannot have the same preferences.

OECD. Average annual hours actually worked per worker. Accessed June 2022.; OECD. Household disposable income. Accessed June 2022.

Drawing indifference curves suggests that Dutch and American workers also have different preferences. Follow the steps in Figure 3.25 to see some hypothetical indifference curves that could explain the differences among countries. The Dutch indifference curve is steeper than the one for the US. This means that at the same amounts of daily goods and hours of free time (indicated by point Q), the Dutch place a higher value on free time relative to goods than do the Americans. (Remember the slope of the indifference curve is the marginal rate of substitution—that is, how much a person values free time compared to how much they value goods.) At point Q, Dutch people are willing to give up more units of daily goods for an hour of free time than the Americans: they value free time more.

This is consistent with the observation that Americans work long hours compared to the people of the Netherlands and most other equally rich nations. It underlines the fact that preferences differ among people, with the people of different nations and cultures having different indifference maps.

Question 3.14 Choose the correct answer(s)

Based on Figure 3.25, read the following statements and choose the correct option(s).

  • If the indifference curves of two countries intersect, the representative workers in those countries cannot have the same preferences.
  • At point Q, the representative worker in the Netherlands values free time more than the representative worker in the US, as shown by the steeper indifference curve at that point.
  • Countries in Figure 3.25 that have lower income per day (such as Mexico and Slovakia) do not necessarily have a lower level of goods consumption compared to other countries, because we have not accounted for the effect of income taxes or differences in the price of goods across countries.
  • Cross-country differences in working hours are due to a combination of differences in constraints and preferences.
  • The indifference curves of a single individual cannot cross (as discussed in Section 3.3). If indifference curves of two countries cross, we therefore cannot think of workers in both countries as behaving like a single representative individual.
  • The steeper indifference curve indicates that at point Q, the representative Dutch worker is willing to give up more units of daily goods for an hour of free time than the representative American worker.
  • As described in the figure caption, the income values shown in Figure 3.25 have already been adjusted for taxes and differences in purchasing power across countries.
  • Differences in preferences can explain why the representative workers in countries with similar constraints make different choices (such as the US and the Netherlands). Differences in constraints can explain why the representative workers in countries with similar preferences make different choices (such as the US and South Korea).

Exercise 3.14 Preferences and culture

Suppose that the points plotted in Figure 3.25 reflect the choices of free time and consumption made by workers in these five countries according to our model.

  1. Is it possible that people in Australia and the US have the same preferences? If so, how will a wage rise in Australia affect consumption and free time? What does this imply about the income and substitution effects?
  2. Suppose that people in Mexico and South Korea have the same preferences. In that case, what can you say about the income and substitution effects of a wage increase?

Exercise 3.15 Working hours across countries and time

Figure 3.15 (reproduced below) illustrates what has happened to working hours in many countries during the twentieth century. (The UK is in both charts to aid comparison.)

Fullscreen

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.; Penn World Tables 10.0. 2021.

  1. How would you describe what happened?
  2. How are the trends in the countries in Panel A of the figure different from those in Panel B?
  3. What possible explanations can you suggest for why the decline in working hours was greater in some countries than in others?
  4. Why do you think that the decline in working hours is faster in most countries in the first half of the century?
  5. In recent years, is there any country in which working hours have increased? Why do you think this happened?