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Habit, Prisoner’s Dilemma and Americans’ Welfare Cost of Working Much More than Europeans

Listed author(s):
  • Maurice Schiff

Europeans work much less than Americans. Some studies claim this is due to high taxes in Europe, which would benefit by adopting US tax rates and work time; others find that taxes have little or no impact on work time. I examine the hypothesis that Americans would benefit by reducing work time to Europe’s level. Empirical and experimental studies show utility falls as other people’s income rises. Due to its historical experience, Europe is able to internalize this and other negative externalities by restricting work time – through minimum vacation time and maximum weekly work hours – while the US is not, resulting in a Prisoner’s Dilemma “overworking trap” equilibrium. A simple model and work time data are used to derive the US welfare gain from reducing work time to Europe’s level. Findings are: i) parameter values are consistent with experimental results on the relative impact of own and other people’s income; ii) the welfare gain’s present value is about 120 percent of annual welfare; and iii) even if Europe's policy reduces work time excessively, it does remain beneficial as long as the reduction is less than twice the optimal one.

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File URL: http://cadmus.eui.eu/bitstream/handle/1814/34705/RSCAS_2015_02.pdf?sequence=1
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File URL: http://hdl.handle.net/1814/34705
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Paper provided by European University Institute in its series RSCAS Working Papers with number 2015/02.

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Date of creation: Feb 2015
Handle: RePEc:rsc:rsceui:2015/02
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  1. Mark Aguiar & Erik Hurst & Loukas Karabarbounis, 2013. "Time Use during the Great Recession," American Economic Review, American Economic Association, vol. 103(5), pages 1664-1696, August.
  2. Burda, Michael C. & Hamermesh, Daniel S., 2010. "Unemployment, market work and household production," Economics Letters, Elsevier, vol. 107(2), pages 131-133, May.
  3. Conny Olovsson, 2009. "Why Do Europeans Work So Little?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(1), pages 39-61, February.
  4. Yongjin Park, 2010. "The Second Paycheck to Keep Up with the Joneses: Relative Income Concerns and Labor Market Decisions of Married Women," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 36(2), pages 255-276, Spring.
  5. Olivier Blanchard, 2004. "The Economic Future of Europe," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 3-26, Fall.
  6. J. Solnick, Sara & Hemenway, David, 1998. "Is more always better?: A survey on positional concerns," Journal of Economic Behavior & Organization, Elsevier, vol. 37(3), pages 373-383, November.
  7. McBride, Michael, 2001. "Relative-income effects on subjective well-being in the cross-section," Journal of Economic Behavior & Organization, Elsevier, vol. 45(3), pages 251-278, July.
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