The Incentive for Working Hard: Explaining Hours Worked Differences in the U.S. and Germany

Abstract

This paper seeks to explain the greater hours worked by Americans compared to Germans in terms of forward-looking labor supply responses to differences in earnings inequality between the countries. We argue that workers choose current hours of work to gain promotions and advance in the distribution of earnings. Since US earnings are more unequally distributed than German earnings, the same extra work pays off more in the US, generating more hours worked. Supporting this inequality-hours hypothesis, we show that in both countries hours worked is positively related to earnings inequality in cross section occupational contrasts and that hours worked raises future wages and promotion prospects in longitudinal data.