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Vacation Time
Subject Recession
Topic International Finance, Productivity and Growth
Key Words Economic Growth, Productivity, Stagflation
News Story

The arithmetic of economic growth is fairly simple. The growth rate of total output is equal to the growth rate of labor hours plus the growth rate of productivity. Applying this formula to Europe, we find that in the past 20 years average hours worked annually per employee has declined by about 17 percent. This decline has hindered Europe's goal to become the most competitive economy in the world. Annual hours worked has not declined in the U.S. and growth per capita was twice the rate of Europe's leading economies in the decade of the 1990s.

The decline in the annual number of hours worked in Europe can be traced to the stagflation of the 1970s. In response to the oil price hikes and resulting decline in demand, U.S. employers cut employment dramatically. Unemployment climbed to double-digits as employers discharged workers. Europe's governments followed a different course of action. They passed a number of laws to protect workers from layoffs.

The interest of European governments and unions in preventing layoffs and promoting worker interests continued and is responsible, in part, for the continuing decline in annual hours worked. France passed a law three years ago that reduced the average workweek from 39 to 35 hours. Labor unions argued that this law would promote efficiency and create employment, but this has not been the case. Other examples of regulations resulting in decrease in annual hours include parental leave in Sweden, which has increased threefold, to 480 working days per couple over the past 20 years. In several European countries¾including Italy, Spain, and the Netherlands¾vacation time has nearly doubled, with 6 weeks now the norm across Europe.

Essentially, Europe used its increased prosperity to buy more leisure, while the U.S. used its growth dividend for more consumption. Europeans view Americans as having misplaced priorities. The opportunity cost of time spent at work is less time with family, less social cohesion, and more crime. Europeans have more leisure, but also a higher unemployment rate. Young people have great difficulty finding employment and many young people do not have their first real job until their late 20s. They prolong their education and live with their parents. For example, in Italy, the average age of graduation from college is 28.

(Updated September 1, 2002)

Questions
1. In the 1980s, Europe was close to the U.S. in terms of annual working hours. According to the article, what has happened to annual working hours in Europe and why.
2.

If annual hours of work decline, what will happen to the growth rate of output, everything else remaining the same?

3.

Economic growth in Europe is less than half the rate in the U.S. If standard of living is measured in terms of output per capita, what can you say about the growth in living standards in the U.S. and Europe? Does this measure account for the value of increased leisure? Should it?

Source Christopher Rhoads, "Short Work Hours Undercut Europe in Economic Drive," The Wall Street Journal, August 8, 2002.

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