Wed, Jun 23, 2004 page9

• Europeans tend to prefer taking holidays over turning a profit

  The reason Europe is less productive than the US isn't because Europeans lack a knowledge-based society -- it's because they take so many vacations

  • By Alberto Alesina
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  Currently, the average number of hours worked per person aged 15 to 25 each year in France and Germany is about 50 percent lower than in the US. Other European countries (for example, Italy and Spain) fall somewhere between these poles. Although some Americans boast about their superior work ethic, this disparity in working hours between the US and Europe has not always existed. Indeed, until the mid-1970s, the number of hours worked on either side of the Atlantic was roughly the same.

  From the mid-1970s on, however, Americans continued working more or less the same number of hours, while Western Europeans began working less and less each year. If Western Europe needs an explanation as to why its rate of economic growth is lagging behind the US, it need look no further.

  The average number of working hours per person depends on a variety of factors: the level of participation in the labor force; the number of vacation days workers have; the number of hours worked in a "normal" week, ie, with no vacation.

  Virtually all the difference between the US on one side and France and Germany on the other are due to the first two factors, each with roughly equal weight. So, lower participation in the labor force explains half of the difference, and longer vacations for those who do work accounts for the other half. The importance of vacation time should come as no surprise to anyone who has experienced Europe's deserted cities in August, the three-week vacation "bridges" in April and May in France and Italy, the "rush hours" that take place every Friday at 2pm in German cities, and crowded ski slopes in February due to winter school vacations.

  But knowing "how" Europeans work less is one thing; knowing "why" Europeans work less than Americans is another. One view is that Americans are perceived (and like to see themselves) as Calvinist workaholics, whereas Europeans like to think that they know how to enjoy life's pleasures. As a European working in the US, I admit that I do take many more vacations than my American colleagues. So there may be something in this "cultural" explanation. But why did this start around 1973?

  A second argument attributes the difference to income taxes, which, in fact, have increased significantly in Europe since the 1970s, while in the US income taxes fell from the early 1980s onward. Income taxes certainly must affect willingness to work.

  They may not change by much the number of hours worked by the main breadwinner in a family (typically a man), but they do influence the participation of women in the labor force. After all, why work, when your after-tax salary barely pays for childcare and household help?

  But even this is not a sufficient explanation, because studies of how the supply of labor responds to tax changes suggest that something else must explain the enormous gap between US and Europe, especially France and Germany.

  For the age group over 50, the structure of pension systems is clearly a major factor. It was and remains much more profitable to retire earlier in Europe than in the US. Why should a Frenchman or Italian in his early sixties work today, when in the 1990s he could have retired in his mid-fifties with 80 percent or more of his last working-age salary? For women, the retirement age in the mid-1990s was even lower. Public sector employees had even more advantages.

  Nor is that all. In the 1980s and 1990s, many European labor unions, in response to rising unemployment, adopted the policy of "work less, work all." In other words, they obtained shorter hours (ie, more vacations) in order to keep employment up. The problem is that total compensation did not go down in proportion to the shorter hours, thus leading to an increase in pay per hour. Lower productivity and higher unit labor costs eroded firms' willingness to hire, leaving Europe with chronically higher unemployment than in the US.

  Today's debates about growth in Europe are full of buzz words like "knowledge-based society," "technological progress," and "investment in education." Europeans certainly need something to compensate for a short working life with many vacations.

  But much of this discussion is merely a form of "political correctness." It is more reassuring -- and "feels better" -- to tell Europeans that growth is sluggish because society is not sufficiently knowledge-based, rather than pointing to the trade-off between vacations and growth.

  Europeans tend to prefer vacations over growth. Personally, I love taking more and more vacations. But I cannot (and do not) then complain if my income does not grow faster and faster.

  Alberto Alesina is professor of economics at Harvard University.

  Copyright: Project Syndicate
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