Abstract
Over the last few decades, hours worked per capita have declined substantially in many OECD economies. Using the standard neoclassical growth model with endogenous work–leisure choice, we assess the role of trend growth slowdown in accounting for the decline in hours worked. In the model, a permanent reduction in technological growth decreases steady‐state hours worked by increasing the consumption–output ratio. Our empirical analysis exploits cross‐country variation in the timing and size of the decline in technological growth to show that technological growth has a highly significant positive effect on hours. A decline in the long‐run trend of technological growth by 1 percentage point is associated with a decline in trend hours worked in the range of 1–3%. This result is robust to controlling for taxes, which have been found in previous studies to be an important determinant of hours. Our empirical finding is quantitatively in line with the one implied by a calibrated version of the model, though evidence for the model’s implication that the effect on hours works via changes in the consumption–output ratio is rather mixed.
Highlights
The effects of technology shocks for the short-run dynamics of hours worked have been analyzed extensively in the business cycle literature
Controlling for cross-sectional and time fixed effects, we find that a one percentage point decrease in trend technological growth leads to a decrease in the trend of hours worked in the range of one to three percent depending on the specific technology measure, the trend extraction method, the sample studied, and the treatment of outliers
The standard neoclassical growth model with exogenous technology implies a positive link between technological growth and steady state hours
Summary
The effects of technology shocks for the short-run dynamics of hours worked have been analyzed extensively in the business cycle literature (see, e.g., Galı, 1999, among many others). McDaniel (2011) focuses on changes in labor tax rates to explain the development of hours for 15 OECD countries, and considers productivity growth as a driving force. Her approach is fundamentally different from ours in three respects, though. Another paper related to ours is the one by Ngai and Pissarides (2008) They build a model of uneven TFP growth in market and home production that leads to long-run changes in market hours.
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