More Working Hours Raise Future Earnings

In the United States working more hours is not just important to one's immediate salary, but has a substantial effect on future earning potential as well.

Europeans generally view Americans as far too obsessed with putting in hours at the office. A popular past-time among Europeans is making disapproving comments about how their American counterparts seem to be all work and no play. But while there is a tendency to view this as a cultural difference -- that somehow people in the United States simply prefer a long workday to leisure time -- the evidence points to a decidedly dollars-and-cents explanation. The United States is a country with relatively high wage inequality -- one that is tied to a reward system in which pay increases and, more fundamentally, an individual's living standards are directly related to a willingness to work more hours. That's the central finding of authors Linda Bell and Richard Freeman in The Incentive for Working Hard: Explaining Hours Worked Differences in the U.S. and Germany (NBER Working Paper No. 8051).

"Put simply, our analysis suggests that the lower hours worked in Germany than in the U.S. is not an isolated fact about German and U.S. behavior, but rather is part of the differences between economies with very different levels of dispersion of earnings," the authors conclude. In other words, compared to Germany, wages in the United States --and future earning potential as well--are determined in much more strict accordance with hours worked.

To illustrate their findings, Bell and Freeman offer the examples of two hypothetical workers, Hans and Hank. Hans works in Germany where pay differences among firms are minimal, job security high, and unemployment and national health care benefits greatly lessen the fear of getting sacked. Hank works in the United States where the situation is the opposite: pay differences are substantial, unemployment benefits meager (and time-limited ), and getting laid-off can put an end to health benefits.

"If Hans doesn't work all that hard, he may not be promoted or given a pay increase, but this will not greatly affect his living standard," the authors observe. "If Hank doesn't put in the hours and effort, he may lose his job or fall in a very wide wage distribution. But if he works hard he may be rewarded by great increases in pay. So Hank works more hours than Hans does."

Bell and Freeman note that in the United States working more hours is not just important to one's immediate salary, but has a substantial effect on future earning potential as well. They find that an American working 2,000 hours per year who increases that by 10 percent, to 2,200 hours, can generally expect a "1 percent increase in future wages." They contrast that to estimates that a year of full-time schooling--that is about 1000 hours of study--increases earnings by about5 percent.

This very pronounced cause-and-effect relationship between hours and earnings renders less puzzling a 1997 survey reported by Bell and Freeman which found "more Americans than Germans" seeking to work additional hours "despite the fact that Americans were already working longer hours per week." But Bell and Freeman see their analysis as having implications beyond offering a rational basis for the ever lengthening American workday. For example, they point out that if wage inequality is bound to "hours worked, it will not be possible for European Union countries to increase the dispersion of wages toward American levels without giving up their relatively low hours worked; nor for Americans to reduce their 'workaholic' behavior without first narrowing the distribution of earnings."

-- Matthew Davis