High taxes and many public policies tilt the decisions of individuals and unions away from hours worked and in favour of more leisure – without due regard to the economy-wide consequences
Policy makers should encourage more work rather than more leisure
There is a case for centralization or coordination of labour market decisions on overall working hours
of) sustainability, in particular when the demographic structure becomes less advantageous. Many institutions and policies in the Nordic countries distort the work-leisure choice of their citizens. There is a relatively good level of social security, protection of the environment, and a well-developed urban infrastructure. Also, there are generous government subsidies for, inter alia, public transport, housing, arts and culture. These public goods or heavily subsidized services are combined with high taxes on income from work, which tilts the choice of individuals in favour of (untaxed) leisure. The large scope of collective action and public goods means that life in the Nordic societies can be relatively “pleasant” even when the individual’s market income is low. This is not just a by-product of the Nordic policy package but reflects the very aim of social and other policies: extensive provision of public goods and social security are the means of insuring citizens against risks and avoiding extreme poverty. In short, individuals are induced to work less than is desirable from a wider (societal) perspective. As taxes and some of the other causes of the distortions cannot be done away with, policy makers should use other instruments to compensate for these distortions (or to “distort” the labour supply choices of individuals in the opposite direction). Also, it should hardly be part of Nordic policy to subsidize programmes encouraging leisure-intensive careers for individuals that have already enjoyed a publicly subsidized education. Thus, policy makers should abolish unnecessary disincentives to work, such as “free years” or other schemes that discourage working.11 Another aspect of this externality has to do with collective agreements on shorter working hours. It is sometimes quite attractive for unions and employers in particular industries to agree on shorter working hours instead of higher wages and salaries. That may seem like a good idea for both the union and its counterpart. However, it should be appreciated that the agreement on shorter working hours has consequences for other workers, who go on working longer hours and pay more taxes to finance services consumed by all (the “common pool” problem).
The labour market: enough workers working enough?
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