Time to get Europe back to work

In his essay “Economic Possibilities for our Grandchildren”, John Maynard Keynes theorised that the natural course of economic development is for wealthier economies to work less. But Europe, where economic growth has stagnated and demographic outlooks are dour, has taken this message too quickly to heart.

According to the European Central Bank, Euro area residents work substantially fewer hours on average than US workers, and have recorded a larger post-Covid drop than their American counterparts. This adds to the list of economic shortcomings relative to the US that are alarming Europe’s policymakers. Germany — which has one of the lowest average working hours in the EU — has been debating measures that would incentivise more working hours, and other nations should look to make similar changes.

IMF research found that there is a gap across Europe between the hours that people desire to work and the hours they actually do, resulting in a 2 per cent reduction in hours worked across the continent. The gap primarily stems from part-time workers and women, and is often due to tax policies that are meant to encourage flexibility, but inadvertently stymie labour uptake.

Raising hours worked in line with unmet desire would benefit Europe. Provided wages are sustained, it would boost tax revenue and could increase productivity. More hours worked could also make Europe more attractive for outside investment. It will be increasingly important to Europe’s future, too, as the continent’s demographic slide is likely to necessitate more working hours to maintain output.

Germany provides a useful case study. In the early 2000s, the advent of “mini jobs”, or tax-free part-time jobs with capped earnings, helped parents and young adults earn extra income. But post-Covid labour hoarding has tightened the labour market, with firms maintaining large pools of employees to protect against labour shortages.

That makes it harder for those working part-time or mini jobs to increase their working hours or make the jump to full-time employment, and the tax-free earnings cap for mini jobs has not kept pace with cost-of-living rises. Germany’s marital “tax-splitting”, where married couples jointly file taxes, also disincentivises lower-paid spouses from working. And burdensome taxes on overtime discourage workers from spending more hours on the clock.

Tax reforms that address labour disincentives, such as increasing the mini job income limit or a proposal by the German finance minister to decrease taxes on overtime earnings, should be explored. European governments should also look to create strong worker incentives by recalibrating the balance between welfare payouts, marginal taxes, and the minimum wage.

The aim of reforms should not be to catch up with the US. America’s inflated working hours are the result of unenviable cost-of-living and welfare idiosyncrasies. Nor should reforms attempt to discourage part-time employment to raise the average — well-crafted polices that allow parents to work part-time can be an economic and demographic boon. And any reforms should be matched with education, technology, and capital investments that boost the output of each additional hour of work. Europe’s productivity has fallen well below the US, and raising it will ultimately be more important than additional hours worked.

Keynes wrote that even at peak development, people will still choose to work, motivated by a desire to contribute to society. AI and new technologies may bring about that end state sooner. But until then, Europe must do more to harness and reward the working spirit.