Habit, Prisoner's Dilemma and Americanss Welfare Cost of Working Much More than Europeans

Abstract

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.