Tuesday, September 07, 2004

Why a little economics goes a long way 

It's little things like this that keep me so hopeful that economics can change people's view of the world.
There is a simple mistake that all of these people are making (not Ruth or Arnold, they are arguing against that very mistake) and it is indeed so simple that even left-leaning economist Brad de Long has noted it. If you raise to a company the cost of employing people they will employ fewer of them. More importantly, they will only employ those who are more productive than those higher costs. We would then expect to see the less productive workers not employed at all.
This in response to the problem of people arguing that Europe has higher productivity because of its labor market restrictions. Somehow people think because productivity per hour is higher that Europe must be richer. As Worrell and Kling point out, it just isn't so. Bruce Bartlett finishes the explanation.
The OECD blames the unwillingness of Europeans to work as the principal reason for the lower output per worker and their lower standard of living compared with Americans. "Research has clearly established a remarkable fact: namely, that the sizable U.S. advantage in real GDP per capita ... is largely due to differences in total hours worked per capita," the report states. It urges European governments to reform their labor policies to increase work hours, a recommendation seconded in a recent report from the International Monetary Fund.
Just because you're working fewer hours doesn't mean you necessarily value leisure higher, when markets aren't free to set wages where marginal benefit equals marginal cost.