Veblen effects, political representation, and the reduction in working time over the 20th century

We explain the substantial decline in work hours over the 20th century by the joint influence of the employees’ “pecuniary emulation” of the “conspicuous consumption” of top income earners and the balance of political power of employers and employees in the presence of conflicts of interest over the issue of working time. We present a new labor discipline model incorporating Veblen effects in which hours are determined by employers and subject to complete contracts but employee work effort is not. We show that while Veblen effects increase the hours sought by employees, the hours selected by profit-maximizing employers may exceed that preferred by employees, who may then seek to reduce work hours by means of collective bargaining or governmental intervention. We also identify conditions under which employees will prefer longer hours than offered by employers. Using newly available data on top income shares, and on work hours from 10 major industrial economies and covering the entire past century we test two hypotheses: that increases in the relative incomes of the very rich are associated with increased hours, while increases in the political representation of workers have the opposite effect. The estimated effects are large in economic magnitude, highly significant and robust to alternative econometric specifications, including country and time fixed effects. Using an alternative data set covering the last third of the past century we show that these results are robust to the inclusion of a measure of taxation and find that decentralized trade union bargaining (but not centralized bargaining) may raise working hours.