Europe.

• Author: Alesina, Alberto
• Position: Economic development

Per capita income in Continental Western Europe (in short, Europe) was catching up with the United States from the end of the Second World War until the mid-1980s; from 1950 to about 1975, we speak of a European miracle. Then, something changed. The United States re-emerged from the difficult decades of the 1970s with a renewed political energy that led to deregulation, increased competition, reduction of marginal tax rates, and restructuring of corporations, which later facilitated the immediate adoption of the innovations from the information revolution. Europe, instead, seemed "stuck:" incapable of gathering sufficient energy to reform itself. This was especially the case for the largest countries: Germany, France, Italy, and Spain.

What Happened?

Let's start with the basics. One of the most remarkable facts about Europeans is that they work much less than Americans. Europeans worked more than Americans in the 1950s and 1960s, when they were lowering their heads in the war reconstruction efforts, first, and then during a period of boom. But then Europeans began to work fewer and fewer hours per capita. While in the early 1970s hours worked per person were about the same in Europe and in the United States, today the French, German, and Italians work about 1400 hours per person per year versus about 1800 hours per person in the United States.

There are three reasons why work hours per person are lower in Europe: 1) fewer people are in the labor force (early retirements, lower worker participation, delayed entry into the labor force, all in various combinations depending on the country); 2) more vacation time for those who do work; 3) lower hours in a "normal" work week. In different proportions for different countries, all three factors matter. For instance, in Italy the first factor, lower participation, is the driving force. In France and Germany, all three factors explain about a third each of the difference with the United States.

Europeans are working less and less for three reasons: first, increasing marginal tax rates (especially from the 1960s to the 1980s); second, a preference for leisure; and, third, labor regulation and union-imposed standards for work time, including retirement regulations. Social multipliers compounds these effects: if a family member or friend has more time off, your own benefit from leisure increases, creating more social demand for leisure. When it becomes the social norm, because of regulations requiring six weeks of vacation, or retirement at age 60 because the law imposes it, then it is difficult to change people's minds about what is "fair".

Working less and maintaining reasonable growth rates is possible if your productivity increases at a healthy pace. In fact, this has been the case for several decades in Europe in the 1950s, 1960s, and later through the 1980s. So, Europeans managed to keep up with the United States by working less but being more and more productive. But in the...