Academic journal article Economic Perspectives

Vacation Laws and Annual Work Hours

Academic journal article Economic Perspectives

Vacation Laws and Annual Work Hours

Article excerpt

Introduction and summary

Many European countries have laws mandating minimum paid vacations and holidays. The U.S. does not. The number of mandated days has risen over time and exceeds the levels taken by the average worker in the U.S. Over the past three decades, annual hours worked in Europe have fallen relative to hours in the U.S. Is there a connection among these phenomena?

To address this question, one must first consider how work hours are determined, as well as the role of vacation policy at the level of the firm and at the level of the country. We summarize evidence for the U.S. that firms care about work hours and use firm-wide vacation policies as a way to regulate them and discuss theories of why, despite worker heterogeneity, they choose uniform vacation policies rather than negotiating leave with individuals. We discuss possible economic rationales for vacation laws and present empirical evidence on whether they affect annual work hours. We also review the sparse literature on the evolution of vacation policy at the firm level and the country level during the twentieth century to obtain insight into the extent to which the laws may be viewed as exogenous with respect to labor supply preferences and other factors that determine work hours.

The heart of the article is a regression analysis of the relationship between the number of weeks of legally mandated paid vacation time and average annual hours. (1) Such an analysis is needed to help sort out the causal effect of the law and because workers and firms respond to the laws by adjusting hours per week and secondary job holding. Most of the analysis uses data for several European countries and the U.S. for various years between 1979 and 1999. A simple regression of annual hours on mandated vacation weeks shows that an additional week of vacation mandated by law is associated with 26.8 fewer hours worked annually. When we control simultaneously for the year and for the country, we find that an additional week of legislated paid vacation results in 51.9 fewer hours worked per year. Given that usual hours per week for full-time workers in the European countries in our sample (excluding Norway) averaged 40.2 in 1998, this estimate implies that mandating an extra week of paid vacation translates more than one for one into a reduction in weeks worked, although one cannot statistically reject a coefficient of 40. As we explain below, this result should be regarded with caution because it is driven by a relatively small number of within-country law changes, although it is robust to extending the sample to include hours and vacation laws from the early 1950s. The estimate falls to about 35 hours per year when we introduce separate time trends for the U.S. and the United Kingdom or estimate the model using only countries that have vacation laws.

Overall, our analysis suggests that at least part of the relationship between the laws and hours is causal and that workers and firms don't fully circumvent the law through changes in hours per week or through multiple job holding. Our results also imply that differences in the laws account for a substantial portion of the difference between the U.S. and Europe in annual hours per worker. They cannot answer the deeper question of whether the laws are a harmful constraint on individual choice or a solution to a market failure in the determination of work hours.

In the next section, we discuss the existing theories that are relevant to the question of the effect of vacation laws on annual hours worked. Then, we review the literature on the evolution of vacation policy. We discuss the data and econometric specification for the study. Then, we present our analysis of the effects of vacation laws.

Determination of work hours and a theory of vacation policy

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