Labor supply and productivity growth

Irasema Alonso

February 2025

Irasema Alonso Labor supply and productivity growth February 2025 1 / 25

Total hours, definition

Total hours (per person):

hE
P
where h is the average hours worked per worker, P is the adult
population, and EP is the employment rate.
Changes in total hours represent both the effect of changes at the
extensive margin of labor (the employment rate) and at the
intensive margin (the actual annual hours of work per person
employed).

Irasema Alonso Labor supply and productivity growth February 2025 2 / 25

 here: over a longer perspective—going back a hundred years and more—and across

Hours worked per worker

many countries, hours worked are falling at a remarkably steady rate: at roughly half
a percentage point per year. Figure 1 illustrates this fact for a set of countries and for
hours on the intensive margin (the extensive margin is rather stationary; we discuss
Hours worked per worker have been falling steadily in rich
this and other data sources extensively in the paper). This finding contrasts the
countries.

3500
3000
2500
2000
1500

1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Figure 1: Hours worked per worker

Notes: The figure shows data for the following countries: Belgium, Denmark, France, Germany, Ireland, Italy, Netherlands, Spain,
Sweden, Switzerland, the U.K., Australia, Canada, and the U.S. The scale is logarithmic which suggests that hours fall at roughly
0.57 percent per year. Source: Huberman and Minns (2007). Maddison (2001) shows a similar systematic decline in hours per capita.

Figure
postwar1U.S.,
illustrates
where hours this fact for
per capita a set
are well of countries
described and
as stationary, butfor
this hours
period on
the intensive
is an exception tomargin.
earlier U.S. history and to postwar data from other countries.
The persistent fall in Labor
Irasema Alonso
hourssupply
worked is not consistent with the preferences
and productivity growth
and
February 2025 3 / 25
Hours worked per worker

Historically, movements in hours per worker exceed those in

participation.
Therefore, we only consider the intensive margin of labor supply.
Hours worked are falling at a rate that appears roughly constant
over longer periods (though, of course, with swings over business
cycles).
This rate is slow–somewhere between 0.3% and 0.5% per year.
In 175 years the number of hours worked halves.

Irasema Alonso Labor supply and productivity growth February 2025 4 / 25

Studies on hours-income correlations across countries are in line
with the long-run time-series data: people work much less in
richer countries.
As output is growing at a steady rate, hours are falling slowly at a
steady rate.

Irasema Alonso Labor supply and productivity growth February 2025 5 / 25

Labor productivity has been steadily increasing over very long
periods.
This steady productivity growth on labor produces
an income effect: you want to work less
and a substitution effect: you want to work more.
Key to falling hours is that the income effect slightly outweighs
the substitution effect.
Here we ask: is there a stable utility function such that
consumers choose a balanced growth path with constant growth
for consumption and constant (negative) growth for hours if
labor productivity grows at a steady rate?

Irasema Alonso Labor supply and productivity growth February 2025 6 / 25

Preferences

King, Plosser, and Rebelo (KPR) showed that the preferences they
put forth were the only ones consistent with an exact balanced
growth path for all the macroeconomic variables with the
restriction to constant hours worked.
KPR did this because in the U.S. postwar period, hours worked
per capita had been constant.
Most other countries have seen a decline in hours worked per
capita.

Irasema Alonso Labor supply and productivity growth February 2025 7 / 25

 a slope coefficient of -0.00315 in the full sample (and
-0.00208 for the years 1970–2015).

Figure 2: U.S. hours in the long run

1500
Average annual hours
1300
1100
900

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

United Kingdom France Sweden

Japan Italy Germany
Canada Poland Switzerland
United States

Figure 3: Selected countries average annual hours per capita aged 15–64,
1950–2015
Notes: Source: GGDC Total Economy Database for total hours worked and OECD for the data on population aged 15–64. The
figure is comparable to the ones in Rogerson (2006). Regressing the logarithm of hours worked on time gives a slope coefficient of
-0.00393.

and Minns (2007) for a set of developed countries. Have these steady downward
trendsAlonso
Irasema petered out? Turning to a slightly
Labor supply di↵erent
and productivity sample of developedFebruary
growth countries
2025 8 / 25
U.S. hours worked per worker

What accounts for stable total hours per capita is that women’s
participation in the labor market has grown from a very low to a high
level.
Irasema Alonso Labor supply and productivity growth February 2025 9 / 25
Broader class of preferences

The broader class of preferences the authors consider is strictly

larger in that it also allows hours worked to change over time at a
constant rate along a balanced path.
The standard (KPR) period utility function is a power function of
cv(h):
(cv(h))1 1
u(c, h) =
1
where c is consumption and h hours worked and v is an arbitrary
decreasing function.
The authors show that their broader class has a similar form.
Period utility function is a power function of
⌫
cv(hc 1 ⌫ )

where ⌫ < 1 is the new key preference parameter.

Irasema Alonso Labor supply and productivity growth February 2025 10 / 25
KPR preferences

KPR:
(cv(h))1 1
u(c, h) =
1

One special case of KPR is

1
h1+ ✓
u(c, h) = log(c)
1 + 1✓
✓ 1
◆
h1+ ✓
which follows by setting = 1 and v(h) = exp 1+ ✓1

The KPR class does not admit hours falling at a constant rate.

Irasema Alonso Labor supply and productivity growth February 2025 11 / 25

An example with falling hours

Recall, one special case of KPR is

1
h1+ ✓
u(c, h) = log(c)
1 + 1✓

So let’s consider a case outside this class which was proposed by

MaCurdy:
1
c1 1 h1+ ✓
u(c, h) =
1 1 + 1✓
a generalization allowing different consumption curvature than
the log case above.

Irasema Alonso Labor supply and productivity growth February 2025 12 / 25

MaCurdy again:
1
c1 1 h1+ ✓
u(c, h) =
1 1 + 1✓

The intratemporal FOC:

uc (ct , ht )wt = uh (ct , ht )

which becomes: 1
wt ct = ht✓

Irasema Alonso Labor supply and productivity growth February 2025 13 / 25

Is this equation
1
wt ct = ht✓
consistent with balanced growth with hours falling at a constant
rate?
Suppose that wages grow at > 1, consumption at rate c, and
hours at rate h , all in gross terms.
For the FOC to hold at all points in time we need that
1
✓
c = h

Irasema Alonso Labor supply and productivity growth February 2025 14 / 25

For labor income and consumption to grow at the same rate, we
need
h = c

Using the FOC above:

1
✓
c = h

we have 1
✓
( h) = h

1
1 ✓
+
= h

Then
✓(1 )
h = 1+✓

Hours fall over time if > 1 (are constant if = 1).

1+✓
And consumption grows at the rate c = 1+✓ .

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Notice that if we call
✓(1 )
⌫=
1+✓
then,
1+✓
1 ⌫=
1+✓

So
⌫ 1 ⌫
h = and c =

Then, c = h, becomes
1 ⌫ ⌫
=

where is wage growth.

Irasema Alonso Labor supply and productivity growth February 2025 16 / 25

Take logs on the expression 1 ⌫ = ⌫:

(1 ⌫) log = log ⌫ log

Call = 1 + g . Then,

(1 ⌫) log(1 + g ) = log(1 + g ) ⌫ log(1 + g )

And we arrive to the following approximation:

(1 ⌫)g = g ⌫g

If increases by one percentage point (i.e., g increases by 0.01),

then the fraction ⌫ of that 1 percent increase in productivity goes
into more leisure instead of into consumption.
And the fraction 1 ⌫ of that increase in productivity goes into
more consumtion. And this is because people are working less
hours (consuming more leisure).
Irasema Alonso Labor supply and productivity growth February 2025 17 / 25
Estimating ⌫

We use the time series data to estimate ⌫.

In the data productivity and hours grow annually at, say, 2% and
-0.4%, respectively.
We would obtain an estimate of ⌫ from
⌫
= 0.996 (gh = 0.4%)

⌫
0.996 = 1.02
of ⌫ = 0.2.
With ⌫ = 0.2 and = 1.02, the 0.4% fall in hours per year makes
per capita consumption grow by 1.6% in the long run.
1 ⌫
= 1.021 .2
= 1.016.

Irasema Alonso Labor supply and productivity growth February 2025 18 / 25

In terms of gross growth rates, if productivity grows at rate ,
then hours worked grows at rate ⌫ , whereas consumption
grows at 1 ⌫ .
⌫
For ⌫ > 0, the factor c 1 ⌫ multiplying h in the more general
utility function captures the stronger income effect.
As consumption grows, there is an added “penalty” to working
since v is decreasing.
Standard (KPR) preferences correspond to ⌫ = 0.

Irasema Alonso Labor supply and productivity growth February 2025 19 / 25

Period utility function is a power function of
⌫
cv(hc 1 ⌫ )

⌫ is the fraction of a 1 percentage-point productivity gain that the

representative household chooses to convert into more leisure as
opposed to into more consumption, along a balanced growth
path.

Irasema Alonso Labor supply and productivity growth February 2025 20 / 25

Hours worked – cross section

For the cross-section of countries, our theory predicts that labor

productivity (or GDP per capita) should be negatively correlated
with hours worked.
Empirical work for a sample of countries, including developing
countries, establishes such a fact.

Irasema Alonso Labor supply and productivity growth February 2025 21 / 25

Irasema Alonso Labor supply and productivity growth February 2025 22 / 25
Conclusions

This has been an extension to the standard preference

framework used to account for the balanced-growth facts.
The new preference class admits that hours worked fall at a
constant rate when labor productivity grows at a constant rate,
as we have also documented that data to show across time and
space.
A one percentage point productivity gain admits an equal
consumption gain, but under our setting individuals choose to
benefit from this gains by also lowering hours worked.
This effect is captured by the parameter ⌫.
Hours fall by ⌫ percent of the productivity increase and
consumption only rises by 1 ⌫ percent of that productivity
increase.

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Conclusions

Regarding growth theory and growth empirics, note that on our

balanced path, the main macroeconomic aggregates (output,
investment, consumption) grow at the gross rate 1 ⌫ > 1, i.e., at
a rate lower than productivity and in a way that is determined by
the preference parameter ⌫.
From a development perspective, falling hours worked is not a
sign of economic malfunctioning but rather the opposite.
It is the natural outcome given preferences and productivity
growth.
And it illustrates clearly how output growth is an incomplete
measure of improved welfare over time in the development
context (see Jones and Klenow, 2016).
Leisure grows too, and from the perspective of our labor supply
theory, joint output and leisure growth is what we should expect.

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Conclusions

Interestingly, our theory says that growth theory probably should

not abstract from labor supply (which is typically set to “1” in
models).
Rather, it seems an important variable to model as it determines
the growth of long-run output in conjunction with the process of
technical change.

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