Why Europe Works Less and Grows Taller

1. WhyEurope Works Less and GrowsTaller Thorvaldur Gylfason

2. Overview • Comparison of Europe’s economic performance with that of the United States • Three suggestions • Output per hour worked – that is, labor productivity – is a better measure of economic performance than output per person • Output, like assets, might be better viewed in two dimensions: average level of output, or income, and its distribution across the population • Anthropometric studies might help quantify the missing dimension

3. Gross Domestic Product: Three Measurement Problems • Leaves out • Domestic production (child rearing) • Black economy (drugs trade) • Changes in macroeconomic stocks • Environmental pollution (green national accounting) • Accumulation of external debt • Exchange rate problem has been solved by ppp adjustments • Does not accord well with measures of happiness • Does not take into account the effort behind the output, especially work • GDP per hour says more than GDP per capita • Reflects efficiency, that is, labor productivity • Sustainable GDP divided by an index of input use would be a still better measure of economic performance

4. GDP Per Capita 2005(USD at 2005 prices, ppp)

5. Hours of Work 2005

6. Annual Reduction in Hours Worked 1950-2005

7. GDP Per Hours Worked(USD at 2005 prices, ppp) Inefficiency (high food prices, etc.) necessitates more work and results in less output per capita than otherwise, as in Japan

8. Greater Reduction in Hours Worked in Europe than in US: Why? • Europe loves leisure (Blanchard) • European labor unions reduce work (Alesina) • Europe’s heavy tax burden reduces willingness to work (Prescott) • European values – economic culture! – is different than in the US (Phelps) • Conclusion: Perhaps Europeans want to work less than Americans • But voluntary reduction in work need not be a sign of weakness, on the contrary • Double benefit of growth and increased welfare: Higher income, less work

9. Greater Reduction in Hours Worked in Europe than in US: Why? • 25-50 year old wage earners • Same labor force participation in Europe and US • Suggests similar propensity to work, similar values • Wage earners in their 60s • Three out of four European wage earners have quit work • Half of US wage earners continues to work • Workers in their 70s • Nine out of ten European wage earners have quit work • A fourth of US wage earners continues to work • Perhaps Europeans can afford to retire earlier than Americans? • Europe: More social security, more equality, more time • US: Higher income per capita

10. GDP Per HourWorked and HoursWorked 2005 Americans work more than all other high-income nations except the Greeks

11. Inverse Relationship Between Labor Productivity and Work Across Countries • How to explain preceding chart • Increased labor productivity enables people to work less • More efficiency permits more leisure • Backward-bending labor supply schedule • Too much work tends to reduce efficiency • Tired hands make mistakes • What we see is simply a downward-sloping labor demand curve • Increased labor productivity and thereby higher wages reduce demand for labor • Probably all three explanations apply

12. Recapitulation • Despite world’s second highest GDP per capita, US workers need to work hard: Why? • Stronger work ethic in US • Lower taxes encourage work • Less public consumption calls for more private consumption and hence more work • Weaker labor unions price fewer workers out of jobs • One further hypothesis • Large inequalities in US reduce efficiency • Does not show in GDP per capita, but is visible in GDP per hour because social security permits less work • So, assess economic performance in two dimensions • Return and risk (income level and inequality)

13. What Is a Fair Distribution of Income? • View national economy like an asset • Assets carry returns and entail risks • Return is directly related to risk • Few prefer no risk, because then the associated return becomes too small • Few seek maximum return, because then the associated risk becomes too large • Most stake out an intermediate position, balancing the desire for a high return against the desire to keep risk low • Does this idea apply to the national economy?

14. What Is a Fair Distribution of Income? • Anarchy: Income distribution is fair, if all have same opportunities and free markets produce inequality without government intervention • Intervention: Income distribution is fair, if all have same opportunities and government secures that ... • Rawls: The poor have the highest possible incomes • Rawls in reverse: The rich have the highest possible incomes (you know who I mean) • Middle road: The middle class has the highest possible incomes • Another middle road: Average income is at a maximum without excessive inequality

15. Equality and Efficiency Increased equality reduces efficiency Utopia? France Sweden Efficiency (income per capita) Increased equality increases efficiency Where is the optimum? South-Africa Equality

16. Equality and Efficiency Increased equality reduces efficiency France US Sweden Efficiency (income per hour worked) Increased equality increases efficiency South-Africa Equality

17. Ten Examples of Income Distribution Across Ten Individuals

18. Gini and the Standard Deviation of the Distribution of Income Gini index mirrors the standard deviation of the income distribution

19. Gini and the 20/20 Ratio Gini index is closely related to the 20/20 ratio

20. Gini Index, Various Years US Turkey Portugal Estonia New Zealand UK Italy Ireland Iceland Greece Australia Poland Latvia Spain Switzerland Canada France Lithuania South Korea Netherlands Luxembourg Austria Slovenia Germany Hungary Finland Slovakia Norway Czech Republic Sweden Belgium Japan Denmark

21. Various Social Indicators: Same Story • Americans do not live as long as Europeans • 1960: Ten months shorter lives in US • 2003: Fifteen months shorter lives in US • White Americans used to be taller than Germans, now Americans are shorter • 1960: Americans were 2-3 cm taller • 2000: Americans are 2-3 cm shorter • Human stature depends mostly on social conditions in youth, and is final • Reflects past economic conditions • Nutrition, environment, health, housing, stress • Is America lagging behind Europe?

22. Anthropometrics: Other Examples • West-Germans, 20-70 years old, men and women, are on average 1 cm taller than East-Germans • US high-income earners, of both genders and of all ages, are on average 1-2 cm taller than US low-income earners • College-educated Americans, of both genders and of all ages, are on average 3-4 cm taller than those Americans who have acquired no education beyond primary school

23. Human Height and Inequality

24. Jail Population and Inequality

25. In Conclusion • Europe seems to be catching up with the US • Seven European countries already produce more output per hour than the US • Europeans have grown taller than Americans since1960 • In US, a poor underclass reduces average stature and labor productivity, not in Europe • This shows in GDP per hour, but not in GDP per capita, as Americans compensate by working hard • Europeans work less than Americans • Europe can afford to work less due to higher and more equally distributed living standards • Or can it? That is the question