Increasing income inequality induces people to work longer hours, according to new research by economics professors Samuel Bowles and Yongjin Park. Writing in the latest issue of the Economic Journal, they explain that keeping up with the Joneses requires longer hours on the job because the consumption styles that people wish to emulate are those of the rich – and in many parts of the world, the rich are pulling away from the rest.
In a similar way, people in countries where economic inequality is in decline tend to reduce their working hours. In Sweden, for example, average annual working hours fell by 25% during the heyday of social democratic levelling between 1960 and 1980. But in the next two decades, with inequality rising again, Swedish working hours increased by 12%.
Differences in working hours between countries also reflect economic disparities. Compared with more equal economies such as Sweden, Germany and the Netherlands, workers in the United States work far longer hours. In the year 2000 for example, they clocked 450 more working hours on average than their Dutch counterparts, a difference of three months of work by US standards.
The researchers estimate the effect of inequality on working hours using a variety of measures of income equality and working hours for ten advanced economies over the period 1963-98. They control for the correlated effects of both changes over time and national differences in such possible influences as the fraction of women in the labour force, the wage, the level of trade union membership and unemployment. Controlling for all of these factors, the effect of inequality on working hours is substantial. For example, the authors” estimates indicate that about three-fifths of the difference in working hours between Sweden and the United States in the early 1990s was due to greater US income inequality.
The authors consider the possibility that the ”rat race” effect of greater inequality reflects ordinary incentives rather than trying to keep up with the rich. According to this alternative view, the greater the rewards from moving up, the greater will be people”s willingness to work more in the hope of being promoted.
But this does not explain the Bowles and Park results. Drawing on another study by Park, they report that inequality among male workers in the United States has a strong influence on whether their wives work outside the home. It is difficult to see how the promotion incentive could be at work in this case.
The idea that consumption standards are set by the rich and then cascade down the ladder of economic success, imposing a rat race on those below is from the maverick American economist Thorstein Veblen”s 1899 classic, The Theory of the Leisure Class. Bowles and Park reason that what Veblen termed the ”conspicuous consumption” of the rich is analogous to standard textbook ”spillover” effects like pollution. The conventional economic prescription for these negative spillovers is that they should be taxed, a policy that Bowles and Park endorse.
But to curb the downward cascade of conspicuous consumption, they show, what is needed is not a flat tax, but one that targets the consumption of the well to-do standardsetters.
”Inequality, Emulation, and Work Hours: Was Thorstein Veblen Right?” by Samuel Bowles and Yongjin Park is published in the November 2005 issue of the Economic Journal. Samuel Bowles is at the Santa Fe Institute. Yongjin Park is at Connecticut College.