The Circular Relationship Between Productivity and Hours Worked: A Long-Term Analysis

We analyze the circular relationship between productivity (or wages) and hours worked. Different channels come into play in this circular relationship: productivity (or wages) impacts hours worked through either an income channel or a substitution channel, while returns to scale of hours worked depend on a fixed-cost channel or a fatigue channel. We estimate the two equations of this circular relationship, using the IV estimation method, on two separate datasets for advanced countries: a long-term (1890-2019) country panel database, and a country-industry panel for a shorter, more recent period (1995-2019). The main results are: (i) the income channel outweighs the substitution channel in the long term: increased productivity or higher wages reduce the number of hours worked; (ii) the fatigue channel outweighs the fixed-cost channel: a reduction in hours worked raises productivity (or hourly wages). According to our results, a productivity revival brought about by the digital revolution and resulting in the same productivity growth as was observed in the US from 1900 to 1975 would reduce hours worked to 25 h per week by the end of this century.