Wednesday, May 13, 2009

The end of the Overworked Americans? (and the end of the 35-hour week)

The decade of the 80s was characterized by a continuous increase in the number of hours worked in the US. It was a combination of an increase in the number of individuals who were part of the labor force and an increase in the average number of hours worked by a typical worker. This increase in number of hours represented a break in the historical trend were productivity gains led to an decrease in the number of average hours worked in favor of additional leisure. This trend led to the label of "overworked Americans" for US workers. It did not help that the Europeans were following the opposite trend by accelerating the historical trend of decreasing hours per worker (as in the 35-hour week in France) and by increasingly generous early retirement programs, which were a political response to the high unemployment rates of previous decades.

This divergent trend between the US and European economies continued during the 90s. This was a decade where the US outperformed Europe in terms of GDP growth. While some of this was due to larger increases in productivity (the "new economy"), the majority of it was due to an increase in the employment to population ratio as seen in the chart below. 

The story has changed since the end of the 90s. The Europeans realized that there was a need to reverse the trend of recent years, which led to labor market reforms and increases in employment. The US labor market suffered large employment losses during the 2001 recession and the recovery that followed was unusual in terms of low employment growth. And before the employment to population ratio could reach the pre-recession level, the current recession started. The US is now at a level which is below the one in 1992. The Euro economies did not suffer much through the 2002/03 crisis and so far the fall in employment in the current crisis has not been as dramatic as in the US.

There is no easy explanation for why the US labor market has not performed better since the end of the 90s. It is true that it had reached a level of employment from where it was difficult to continue growing so maybe there was some truth to the expression "overworked America" (be careful reading the chart above as both series are normalized to 100 in 1992, the employment to population ratio in the US remains substantially higher than in Euro countries). Going forward, it is possible that we see employment growing fast again in the US. With the large destruction of wealth in the US because of the collapse of housing and stock prices, the only way to keep up with the previous living standards is by working longer hours and having more than one income in every household. And those who had planned to retire soon, might be required to work some extra years to compensate for the loss of their pension plans. 

Antonio Fatás

on May 13, 2009 |   Edit