2002 Labor Supply, Europe vs. U.S. OECD U.S 5.8% Euro pe Standardized Unemployme
ID: 1103575 • Letter: 2
Question
2002 Labor Supply, Europe vs. U.S. OECD U.S 5.8% Euro pe Standardized Unemployment Rate Labor Force Participation Rate Employment Ratio Vacation Days Taken per Worker Annual Hours Worked per Worker 8.6% 67% 61% 35 1545 72% 14 1815 a) Discuss why hours worked per person might be lower in Europe than in the United States. Support your arguments graphically, explaining in terms of substitution and income effects on labor supply. b) Explain how annual hours worked per person in a population can be related to that population's: (i) rate of being out of the labor force; (ii) its unemployment rate; (iii) average weeks worked per year, conditional on being employed; and (iv) hours worked per week, conditional on being at work.Explanation / Answer
a) Average hours worked per person in Europe is low because workers enjoy long weekends and more vacations.They have plenty of geographically aesthetic places compared to the US so they tend to take long vacations and this is evident from the number of vacations taken by an average worker which is 2.5 times more than that of a US worker
Hence, income effect is robust enough to outweigh the substitution effect for workers in Europe. Europeans work less and enjoy more leisure relatively.
b) When more people are out of work, total working hours are relatively lower and so the average hours worked per person is also lower. When unemployment rate is higher, it means many workers are not working which again implies that total working hours are relatively lower and so the average hours worked per person is also lower.
When per week hours are lower (40 hours vs 35 hours a week) total number of hours in the year is low and so the average hours worked per person is also lower. Similarly, when workers work for fewer weeks in an year, the total working hours are relatively lower and so the average hours worked per person is also lower.
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