Work Hours, Inequality and Redistribution: Veblen Effects Reconsidered

Abstract

In this paper we examine link between work hours and inequality in 12 countries. Our pooled regressions indicate that increase in top 1 per cent income share will increase average annual hours worked. Our results are in line with Bowles and Park (2005) who proposed that the explanation for this relationship might be the Veblen effect of the consumption of the rich on the behaviour of those of less well off. Furthermore, we show that the effect varies between time periods and country groups. However, we also find that considerable amount of the total effect of previous evidence is due to residual autocorrelation. We also study normative policy implications of Veblen effects in the context of optimal nonlinear income taxation. Using numerical simulation we study how Veblen effects affect the extent of optimal redistribution both with welfarist and non-welfarist social objectives. Our numerical results provide some support for the view that optimal tax policy may mitigate externalities arising from Veblen effects.