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What’s it: Aggregate hours worked refers to the total number of hours worked by the labor force in an economy during a given period. It represents the total time it takes for laborers to produce the gross domestic product in one year.
Why aggregate hours worked matters
First, we can use it to measure labor productivity in a country. In microeconomics, we typically use output per hour worked instead of output per worker. We can use either the quantity of output or the output’s monetary value as a numerator in the calculation.
- Labor productivity = Total output / Hours worked
Why is the output per hour? Output per worker does not take into account variations in the number of hours worked by individuals. When we compare productivity between firms or industries, it generates bias due to differences in working hours practices. The bias arises due to the following factors:
- Worker skills and experience. For example, a high level of technical expertise allows workers to be more productive.
- Capital equipment’s technology and age. Industries on capital generate higher output per worker than labor-intensive industries. Likewise, more advanced technology allows workers to produce more output using the same input.
Furthermore, we can apply the above productivity concept to the economy. In this case, we replace total output with real GDP and use aggregate hours worked as the denominator.
- Labor productivity = Real GDP / Aggregate hours worked
The formula shows that a country’s labor productivity is higher when fewer aggregate hours are needed to produce the same real GDP.
Second, we can use it to measure potential GDP. We can also interpret the formula above: if labor productivity is higher, a country can produce more output of goods and services than another for the same number of hours worked.
We can then apply labor productivity and aggregate hours worked into a mathematical function to explain potential GDP. Since potential GDP represents long-run output, the other variables must also be in the long run.
- Potential GDP = Aggregate hours worked × Labor productivity
Or, if we convert it to a growth rate, the formula is as follows:
- Potential GDP growth rate = Long-run labor force growth rate + Long-run labor productivity growth rate
Calculate aggregate hours worked
Actual working hours covers:
- Regular full-time working hours
- Part-time working hours
- Overtime hours
- Hours worked in additional jobs
It excludes time off from work due to public holidays, annual leave, personal illness, temporary injury and disability, maternity leave, training, and labor strikes or disputes, or other reasons.
We use the term aggregate to refer to the economy as a whole, not individual workers, factories, or enterprises. Thus, aggregate hours worked show us the total hours worked in a year to produce aggregate output. To calculate it, we can use the aggregate hours worked formula below:
- Aggregated hours worked = Labor force × Average hours worked per worker
Factors affecting aggregate hours worked
In the economy, aggregate hours worked depend on factors such as:
- Population growth. A high population growth rate increases the total labor force, which is positively correlated with aggregate hours.
- Labor force participation rate tells us how active the working-age population is in economic activity. They may be unemployed but actively looking for jobs or at work. Thus, higher participation increases the total labor force.
- Age distribution. The working-age population dominates in several countries, such as Indonesia. Meanwhile, for others, the elderly population dominates. This difference affects the supply of labor (labor force).
- Standard working hours. The general standard of working hours is 48 hours per week. Usually, it starts between 8:00 and 17:00. The number of hours worked varies between countries. For example, in the United States, the number of hours worked in a year was 1,779 hours per worker in 2019, lower than Mexico (2,137 hours), citing data from the OECD.
- Shift in employment, for example, from part-time jobs to full-time jobs or vice versa. Such changes have been increasing recently in line with the gig economy trend, where part-time jobs are gaining popularity.
- Technological factor. Technological advances can also change working hours. For example, to produce the same output, advanced technology allows workers to work faster than before.
In developed countries, the average number of hours worked has decreased. The growth of part-time jobs, high wage rates, and high tax rates are among the causes.
High wage rates make households more affluent. With sufficient income, they work less and pursue personal satisfaction by having more free time.
The substitution of work time for more free time ultimately results in a backward-bending supply curve in the labor market. The curve shows that, to some extent, an increase in wages decreases the supply of labor, measured in terms of hours worked.
The tax rate also works that way. When the tax rate is too high, people think, “what’s the point of working, if most of the extra income is just to pay taxes.” In other words, it makes the incentive to work longer hours decrease.
Variation in hours worked during the business cycle
The average number of hours worked fluctuates during the business cycle. Businesses will usually adjust the use of labor in line with economic fluctuations.
In the trough phase and before entering economic expansion, businesses usually adjust their working hours by increasing overtime. They will see a further trend of economic recovery. In anticipation of increased demand, they will not recruit new staff because it is more expensive. Alternatively, they would increase overtime hours or use temporary labor.
If the economic recovery leads to expansion, businesses are confident about the prospects for economic growth and demand. They then recruit new permanent workers.
Conversely, during the peak phase and before a contraction, businesses will not necessarily reduce their permanent labor. Instead, they will cut overtime and temporary workers while looking at the direction of economic growth and economic demand going forward. Suppose the economy goes into a contraction or even a recession. In that case, they will cut the permanent staff, resulting in more unemployment in the economy.
