Let us figure out how much Europeans pay for shorter annual hours of work in general and their longer days of vacation in particular. International data comparing Europe and the United States in dollars of equivalent purchasing power show that the ratio of Europe to the United States is 90% for output per hour, 68% for output per person and 75% for hours of work per person. Converting these ratios to real GDP per household (using 2.5 people per household, the US figure for 2004) yields a US GDP per household of $120,000 compared with a European value of $81,600.
But Europeans are not allowed to keep this amount, because OECD data show that they pay 39.15 of GDP in taxes, compared with 25% in the United States. This brings European take-home pay down to $49,700 compared with $90,000 in the United States, or 55% as much. If Europeans worked as many annual hours as Americans, their per-household GDP would be 90% as high (the remaining difference is due to lower productivity) and their take-home pay would leap to $76,100, an increase of 53%. The disproportionate impact on take-home pay occurs because total government tax revenue stays the same, greatly reducing the share of taxes in GDP due to spreading the costs of European government across many more hours of work. Given the large discrepancy in GDP per head, the lower American tax rates generate almost as much tax revenue as the higher European rates: $30,000 compared with $31,900.
This multiplier effect, that raising European hours of work by 32% would raise take-home pay by 53%, carries over to the portion of shorter European hours attributable to longer vacations. So the proper question Mr de Graaf should be asking Europeans is not whether they like their long vacations or would like to enjoy longer ones. Rather, he should be asking whether lengthening their vacations by one more week, five out of the 365 days in the year, or 1.4%, would be worth giving up an extra 4.4% ($2,200) in take-home pay.
Unfortunately, Europeans have not been asked to vote on this question, nor on the question of whether the alternative of working American hours per year (including lower unemployment, higher labour force participation, shorter vacations and a higher age of retirement) would be worth an extra 53% ($26,400 per household) higher take-home pay. Politicians and union leaders have been taken in by the "lump of labour" fallacy and have spun a web of employment protection regulations, restrictions on hours, early retirement and high taxes, in the mistaken belief forcing people to work less creates new jobs for others. Most Europeans would be surprised to learn how much real money they have sacrificed at the altar of this fallacy.
Wednesday, December 30, 2009
Robert J. Gordon is TRULY a Buffoon
In his closing remarks in The Economist debate on European vacations, Professor Robert J. Gordon once again invoked the bogus lump-of-labour fallacy but not before himself committing the "fixed-amount-of-this-that-and-the-other-thing fallacy" oh, about four or five times in a "calculation" of how much income Europeans would take home if they worked as many hours as Americans.