Technological Growth and Hours in the Long Run: Theory and Evidence

Over the last decades, hours worked per capita have declined substantially in many OECD economies. Using a neoclassical growth model with endogenous work-leisure choice, the authors assess the role of trend growth slowdown in accounting for the decline in hours worked. In the model, a permanent reduction in technological growth decreases steady state hours worked by increasing the consumption-output ratio.

The empirical analysis exploits cross-country variation in the timing and the size of the decline in technological growth to show that technological growth has a highly significant positive effect on hours. A decline in the long-run trend of technological growth by one percentage point is associated with a decline in trend hours worked in the range of one to three percent. This result is robust to controlling for taxes, which have been found in previous studies to be an important determinant of hours. The empirical ending is quantitatively in line with the one implied by a calibrated version of the model and the authors provide support for the model‘s implication that the effect on hours works via changes in the consumption-output ratio.