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Will people work more or less in the future?
A daily journey into a better future / No. 60
Good morning from Berlin,
Do you remember yesterday's post? It was about "more income" versus "more free time".
The simple insight was: Everyone should decide for themselves how much they want to work.
However, I left out an important topic: the political framework.
That framework has a significant influence on people's individual decisions. Depending on how this is set, people work more or less.
What does that mean exactly?
The impact of taxes and social security contributions is crucial for deciding how much to work. In Germany, for example, there is a progressive income tax system.
Such a progressive tax takes a larger percentage of income from high-income groups than from low-income groups. For example, a progressive tax system might tax low-income taxpayers at 10 per cent, middle-income taxpayers at 15 per cent, and high-income taxpayers at 30 per cent.
With a progressive tax system, working more is less worthwhile.
But there is also a counter-effect.
In Germany, employees pay around 40 per cent of their gross income to social security. But this does not apply to all payments. There is a so-called contribution assessment limit ("Einkommensbemessungsgrenze"). Above a certain earned income limit, social security contributions are no longer due (in health and long-term care insurance, the cap is about 60,000 Euro per year; in pension and unemployment insurance, it is about 86,000 Euro).
So if you work more, you may not pay social security contributions for income on that additional work.
Consequently, from this theoretical consideration it is not clear how taxes and social security contributions affect the issue of "more work vs. more free time".
However, what is certain is that many things influence people's decisions on how much they want to work. For example, how fulfilling work is and how well-developed childcare is in a society?
But there is something else. Something that is well-known in the economic literature but rarely mentioned in the social debate.
The point is that income is also subject to the phenomenon of diminishing marginal utility. This means that with each additional income, the subjective value of this extra income increases overall, but the additional increase is becoming smaller and smaller with every additional euro earned.
Earning 1,500 Euro a month is essential to pay rent and food. If you earn twice that, you can spend the next 1,500 Euro on vacation and buying an iPhone. You can probably think of products and services people want to have worth another 1,500 Euro.
The thing is that happiness does not grow immeasurably.
In 2010, the economists Daniel Kahneman and Angus Deaton published a notable study, saying that from an income of 75,000 US-dollar a year, your happiness somewhat plateaus, even if your income increases (newer findings, however, argue that "experienced well-being" can continue to rise with income well beyond 200,000 Dollar).
The Future: With its tax and levy system, the state sets the framework by which people decide how much they want to work. With an unchanging framework, it is likely that with technical progress continuing to take place (and thus a tendency towards a further increase in income), the preference for more free time (instead of working longer) will continue to grow.
The Strolling Economist
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