We investigate the importance of Veblen effects on work hours, namely the manner in which a desire to emulate the consumption standards of the rich influences individuals' allocation of time between labor and leisure. Our model of the choice of work hours captures Veblen effects by taking account of the influence of the consumption of the well-to-do on the marginal utility of own consumption of the less well off: the main result is that work hours are increasing in the degree of income inequality. We use data on work hours of manufacturing employees in ten countries over the period 1968-1992, along with data on inequality of income to explore these hypotheses. Inequality is a predictor of work hours in both OLS and fixed effects estimates; its effects are large, and estimates are robust across a variety of specifications. We show that in the presence of Veblen effects a social welfare optimum cannot be implemented by a flat tax on consumption but may be accomplished by more complicated (progressive) consumption taxes or by subsidizing the leisure of the rich.
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Paper provided by Santa Fe Institute in its series Working Papers with number
01-10-061.