US working hours converge with other nations due to non-employment benefits
A BIS working paper finds that the historical gap in working hours between Americans and non-Americans has significantly narrowed since 2000. The convergence is primarily driven by a decline in U.S. hours due to increased government health benefits for the non-employed, while other countries saw hours rise from higher wages and reduced work disutility.
Health benefits reshape US labor supply
The paper updates Prescott's 2004 observation, documenting that about half of the significant working hours gap between Americans and non-Americans from the 1990s has reversed by the late 2010s.
This convergence is concentrated on the extensive margin of labor supply, affecting both men and women.
The study's core finding attributes the decline in U.S. hours per person after 2000 primarily to the rise of government health benefits for the non-employed, particularly Medicaid.
The number of Americans on Medicaid increased from roughly 20 million in the early 1970s to almost 100 million by the early 2020s.
This increase in benefits raises the value of not working, mainly distorting the extensive margin of labor supply.
For non-U.S. countries, the increase in labor supply is generally accounted for by a combination of rising wages and a falling disutility of work, with no single factor as prominent as health benefits in the U.S.
Unpacking the convergence drivers
To analyze the convergence of working hours, the authors develop a tractable labor supply model.
This model incorporates individual heterogeneity, both intensive and extensive margins of labor supply, multi-member households, and a detailed system of non-employment taxes and benefits.
The research conducts a 'horse race' among various explanations, including labor demand forces reflected in wages, changes in the disutility and fixed costs of work, shifts in non-labor income, and government policies.
The study's methodology involves a two-step analysis, starting with detailed U.S. data from the Current Population Survey and Survey of Consumer Finances, followed by an extension to other advanced economies like Canada, Germany, France, Italy, Spain, Sweden, and the United Kingdom using the Luxembourg Income Study database.
Policy implications for labor markets
This paper offers a compelling explanation for a significant shift in global labor patterns, highlighting the unexpected role of health benefits in shaping U.S. labor supply.
Its detailed micro-level analysis across multiple countries provides robust evidence, challenging simpler models of labor market dynamics.
Policymakers should consider the broader implications of social safety nets on labor force participation, especially when designing health and unemployment benefit programs.