Reports 2014/13

Do we have to work more? Macroeconomic effects of less materialistic growth

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How will working less and having more leisure time affect the Norwegian economy in the long term? A gradual shortening of the working day from 7.5 to 6 hours will, in isolation, reduce private consumption per capita by a third by 2060 compared with continuing to work the same number of hours as currently. Nevertheless, consumption in 2060 will be almost double the current level. Reduced working hours requires higher tax rates in order for the current public welfare system to be funded without violating the fiscal rule. In 2060, a tax rate on household incomes must be 10 percentage points higher than in the scenario without reduced working hours, and just over 12 percentage points higher than today.

The report analyses and quantifies the impact on the Norwegian economy of economic growth becoming less materialistic up to 2060, where some of the benefits of productivity growth are offset by shorter working hours.

Specifically, the report examines the effects of a steady decline in average working hours for all employees by 0.5 per cent every year from 2015 until 2058. This entails a gradual reduction in a full working day from 7.5 hours to 6 hours. The main emphasis is placed on two consequences of giving a higher priority to leisure time:

  • • How much will this cost in terms of lower private consumption per capita?
  • • By how much does the average tax burden need to increase in order to continue the current welfare system without violating the fiscal rule, when the tax basis is simultaneously reduced?

These questions are answered using a general equilibrium model for the Norwegian economy that takes into account a variety of factors. The impact is calculated by comparing realistic growth paths for the Norwegian economy based on common assumptions with the exception of working hours.

Private consumption is reduced by a third

In a growth path with shorter working hours, employment per capita in 2060 will be 21 per cent and private consumption per capita will be 32 per cent below a growth path without shorter working hours. Even with such a large decrease in working hours, the real private consumption per capita in 2060 will still be almost double the current level. This is mainly based on the assumption that labour productivity will grow by 2 per cent per year in the private sector and 0.5 per cent per year in the public sector.

The main emphasis in the calculations is based on a comparison of growth paths that takes into account the pension reform of 2011. The pension reform, in isolation, will increase the labour supply going forward compared to the current level. In the growth path with less materialistic growth, the pension reform’s incentives to work more are combined with a higher priority for leisure time. This path is compared with a growth path in which the priority for leisure time is the same as today.

The report also gives estimates from other analyses of how the pension reform will push up the current level of employment and consumption. Although these effects, in isolation, are relatively strong in the long term, the contribution to growth in consumption potential is small compared to the cumulative effects of almost 50 years of productivity growth.

Tax rates must increase significantly in the long term

Even with shorter working hours, tax rates in 2060 must be higher than today in order for the current public welfare system to be continued, including the new pension system, within the framework of the fiscal rule. Working fewer hours reduces almost the entire tax basis, excluding government petroleum revenues. When less materialistic growth is combined with a continuation of the current welfare state, the increase that is needed in the tax rate is therefore significantly higher.

The study illustrates the magnitude of the tax increase needed by comparing it to the taxes paid by households on personal income and assets, and employers’ National Insurance contributions. In 2010, these taxes constituted almost 43 per cent of household income. Without shorter working hours, there is room for gradual tax concessions until 2024, after which the tax rates must be increased every year.

When the necessary tax increase is added to the employers’ National Insurance contributions and the taxes paid by households, the total revenue from these taxes will make up almost 40 per cent of household income by 2060. When the working hours are reduced, the corresponding share of taxes increases to 50 per cent in that year. The study does not examine which tax rates will increase.

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