Source: Ideas and Institutions | Issue #43
Analysis
On Productivity and Working Long Hours
In a recent conversation, Infosys co-founder Mr. N.R. Narayana Murthy requested that the youngsters of India work long hours, suggesting that they should look to work seventy hours a week. He argued that working longer hours would raise work productivity in the country. He exemplified the longer working hours expended by the Germans and Japanese for a certain number of years during the era of post-war reconstruction.
It is true that in those years, workers in Japan and Germany did spend much longer hours than they do now. Going by the International Labour Organization’s estimates, working hours in India at present are shorter than they were in post-war Germany and Japan. The causes behind long working hours may be more complicated than the sheer will to contribute to nation-building. Nevertheless, these examples suggest that Mr. Murthy’s comment was meant as an exhortation to treat the present moment with the kind of urgency those countries must have felt in the post-war period. So, if one accepts the premise of his argument, one may consider his suggestion to work longer hours, which was also part of a broader comment on what India needs to do in the next ten to twenty years.
Mr. Murthy made three other suggestions. First, he suggested that India should learn from other countries that have made significant progress in recent decades. He gave the example of China as a country that India could potentially learn from. Second, he called for a reduction in the government’s corruption levels. Third, he suggested that the bureaucracy should reduce delays in decisionmaking. Seen closely, all these are bold suggestions. It is rare for a business leader to point at corruption in government or call for increasing bureaucratic efficiency. Given the hostilities between the two countries, it is also not easy to suggest that India may learn something from China. The suggestions basically add up to a call to the government to provide a better operating environment. So, he was addressing both the demand and supply sides of the labor markets.
The way he put it, his suggestion to work longer hours is meant to help improve the productivity of workers, or what is called labor productivity. Labor productivity substantially depends on the skills that the workers have, the capital stock they are working with and its efficiency, and the technologies being used. In a wonderful essay published a few years ago to mark a quarter century of the 1991 reforms, Mr. Murthy narrated his experience of trying to import a computer for Infosys in the 1980s. He recounts the challenges he and his colleagues faced due to restrictions related to current-account convertibility and licensing of technology. Growth in labor productivity in India had been quite low in the 1980s but accelerated after the reforms in the early 1990s. This was likely a consequence of reforms that enabled improvements in capital stock and the technologies for converting factors of production into outputs. So, the workers’ education and experience, as well as the context, shape labor productivity. Increasing the number of working hours would raise productivity only up to a point, beyond which it may have an adverse effect (see, for instance, this study, which is one of several to show this association).
There is some suggestive evidence that workers in India do spend considerable time in employment and related activities. The Time Use Survey conducted in 2019 found that the average time that urban men between the ages of fifteen and fifty-nine spend on such activities per week may already be around sixty-one hours (see Statement 10 of the survey). The survey includes time to commute for work in this category. It is not clear how much of this time is spent exclusively on the said activities, as the total of all categories for which time is given adds up to more than twenty-four hours in a day. This is because the survey measures the activities conducted during a particular time slot, and it is often the case that a person may be doing multiple activities within the same time slot. Still, the results are a useful starting point for a discussion on labor productivity. They show that the average urban man does spend a considerable amount of time in employment and related activities.
Since commute time is included in this measure, it is also worth considering how our urban centers are being planned and developed. On October 20, Prime Minister Narendra Modi inaugurated a section of the Delhi-Ghaziabad-Meerut Regional Rapid Transit System (RRTS) Corridor. He also flagged off India’s first semi-high-speed regional rail service. Once fully operational, this RRTS corridor is expected to reduce the commute time between Meerut and Delhi from more than two hours to less than one hour. The estimated cost of this 82-kilometer-long project is around Rs. 303 billion. Some media reporting on this project has shown that many people—probably in the hundreds of thousands, if we go by the feasibility report of the RRTS—commute daily from towns along this route to Delhi. Some of them spend almost six hours commuting—three hours each way. Since most Indian cities do not allow much densification outside of the slums or urban villages, many people spend a relatively long time commuting, which is time spent for “employment and related activity.” This is true not just of smaller cities but also of larger cities—Delhi, for instance, has very few high rises.
While the estimate of time spent on employment and related activities applies to those able to find employment of one kind or another, there is a large problem of low participation in the economy. The Time Use Survey also shows that female participation is quite low in both urban and rural areas, with fewer than a fifth of the respondents found to be engaged in such activities. At the same time, when compared to men, women expend far more time on unpaid domestic and caregiving activities for household members. On average, they spend almost thrice the time that men spend on these activities. As has been widely reported, India’s female labor force participation is quite low. The latest Periodic Labour Force Survey (PLFS) for April–June 2023 shows that labor force participation among urban females is 23.2 percent, while that among urban men is 73.5 percent. The survey also reports that only around 45 percent of those in the working-age population are employed. The PLFS for 2019–20 had also shown high levels of unemployment among those who were more educated—more than a sixth of graduates were found to be unemployed. So, many people are simply unable to work. In particular, women and the educated are finding it harder to participate through employment.
When the Time Use Survey was being conducted in 2019, India’s economy was going through a slowdown—GDP growth had fallen to 3.9 percent, which was the lowest since the crisis year of 2008–09. The two key drivers of India’s growth—private investment and exports—had been faltering for almost a decade. Then the pandemic hit, and the stringent lockdown imposed a huge economic cost in 2020–21. After that, the economy started recovering, and in 2022–23, it was about 10 percent larger than it had been in 2019–20. According to the Centre for Monitoring Indian Economy’s Capex database, in 2022–23, the cost of total private sector projects under implementation was about 20.4 percent of the GDP. This is well below the average for the periods for which similar data is available: from 1995–96 and 2021–22, the cost of total private sector projects under implementation was 30.5 percent of the GDP. Further, as shown in a previous edition of this newsletter, merchandise exports have not been growing for almost a decade, except for a few quarters during the pandemic.
In this context, the choice that individual workers make to spend longer hours might make some difference but may not be transformational. The advice may inspire some who are motivated to build a company like the one Mr. Murthy did. The lives of founders often do involve working long hours. However, for most workers, the ability to work productively at a given point in time depends on how the employers use their time, and this factor may in turn depend on the larger political economy and institutional context in which the employers are operating. The other part of Mr. Murthy’s comment—focusing on the political economy, bureaucratic decisionmaking, and policy reforms—might be more important to pay heed to.
—By Suyash Rai
Review
A Review of the Idea and Implementation of Land Value Taxation
Contemporary scholarly debates on wealth inequality have often pointed to the rising share of housing wealth that is contributing significantly to this phenomenon (see Piketty, La Cava, and Rognlie). According to this literature, the increasing share of wealth is due to the rise in housing and/or housing rents accruing to landowners. This linkage of housing prices to inequality increases the salience of Henry George’s idea of a single tax on land values.
Henry George was an American economist in the late nineteenth century, whose book Progress and Poverty laid out ideas for taxing land value to the exclusion of all other taxes. George’s argument that monopoly ownership over land leads to the creation of economic rent captured by the landowner was based on the ideas first articulated by Adam Smith and David Ricardo. He was, however, among the first to support the idea of a flat land tax to levy the economic rent being generated by landlords. Milton Friedman called Henry George’s land tax on the unimproved value of land the “least bad tax.”
However, the objective behind George’s proposal was not just to identify the most efficient method of taxation but to find a solution to the increasing economic inequality within rapidly industrializing western economies. This makes the idea of a land tax relevant to contemporary debates. Two recent publications, “Impact of Land Value Tax on the Equity of Planning Outcomes” (2023) by Joseph Morgan and Sina Shahab and an IMF Working Paper titled “Equity and Efficiency Effects of Land Value Taxation” (2022) by Gregor Schwerhoff, Ottmar Edenhofer, and Marc Fleurbaey, study whether land value taxes lead to more progressive outcomes in incomes and wealth.
The proposal for a land tax itself originates from the peculiar characteristics of land as a factor of production. Useful land is a scarce resource, and ownership rights give landowners monopoly rights over useful land. Second, land itself does not depreciate in quality, therefore giving the landowner the power to withhold land from use until the price offered to them meets their expectations. Third, the quantity of useful land does not increase or decrease due to taxation since land is a natural resource. This is in contrast to other goods and services, where tax rates affect how much of a particular good or service is produced.
Taxing the value of land should, in theory, pressurize landowners to either use the land to be able to pay taxes or to sell it off to someone who can, bringing such land into use in the process. Land taxes are also considered more efficient than others because they do not affect the amount of land available in the economy. Lastly, the equity argument in favor of land taxes is that taxing away the increase in property value accruing to property owners purely on account of their ownership should, in theory, reduce inequality.
The two aforementioned papers study the equity and efficiency arguments concerning land value taxation. Schwerhoff, Edenhofer, and Fleurbaey explore why land value taxes are rarely used despite their theoretical appeal. Their paper focuses specifically on the “distributional concerns” of land value taxes. It also explains that while some research hints toward the possibility of land taxes being regressive, other research argues that economic rents reduce inequality and that, therefore, land value taxes could reduce inequality.
The authors begin with the assumption that households are heterogeneous in their wealth and asset portfolios and that, therefore, “the share of land in total wealth may vary systematically across households of different wealth. As a result, a land value tax may be more or less progressive.”
They note that since a land value tax is applied on the value of the land rather than the area of the land, the tax base would be non-distortionary, given that the value of all land would fall within the tax base. This will not encourage or discourage the use of land based on its taxability. Second, they consider the case of economies where landowners are largely subsistence farmers. In such cases, they argue that it may not be optimal to tax land rents fully for equitable reasons. Therefore, according to them, there are “situations in which it is optimal to tax land rents fully and other situations where distributional concerns call for less than full land rent taxation.” The decisive factor is the portfolio composition of households in the economy.
To study this empirically, the authors examine price trends for housing and land in the United States and France. Through this, they try to understand the degree to which land value contributes to total wealth. The paper finds that in the United States, the share of land in housing prices has doubled between 1930 and 2010. In France, the increase has been sharper. The share of land in housing prices in France has increased from 40 percent in 2000 to 60 percent in 2010. The paper argues that in these two countries, while a land value tax would be useful in removing other distortionary taxes, the degree to which the land tax is progressive will depend on two factors.
First, it will depend on the degree to which households are indebted. For such households, a land value tax “would also raise a serious concern that the most exposed households may be unable to service their debt.” Second, the degree to which such a tax is progressive will depend on the corresponding reduction in other taxes. A reduction in labor or income taxes should, according to the paper, reduce the net tax burden on both lower- and middle-income households.
The paper therefore concludes that land value taxes can be more equitable in some situations, but adjustments will be necessary due to distributional concerns in some cases. It also emphasizes the importance of considering the effects of land value taxation in conjunction with reductions in other taxes.
Morgan and Shahab study the equity-related arguments in the context of a proposal to implement a land value tax in Wales, and the UK’s Labour Party proposal to replace their municipal tax, also known as the “Council Tax,” with a variant of a land value tax. The paper is different from the one by Schwerhoff, Edenhofer, and Fleurbaey not just because of the geographies but also because Morgan and Shahab study land value taxes in the context of the local urban planning system. Their paper is based on semi-structured interviews with local tax officials, public sector planners in Wales, private sector planning consultants, private sector surveyors, academics, and valuation officials.
The authors highlight the non-distortionary and equitable potential of land value taxes and note that several countries have tried using land value taxes, but their widespread adoption has been difficult. Their research focuses on the difficulties in implementing land value taxes, and the paper lists and illustrates multiple issues that their interviewees highlighted.
First, assessing land values is technically difficult. This is often the case because of the different kinds of ownership and land rights that are hard to understand. Second, according to the authors, Wales has a “discretionary planning system,” which is “…unlike most European countries that employ zoning as the main policy instrument.” If a land value tax were introduced with the current system of planning that is in place in Wales, “it would create a cyclical relationship where the local authority would be encouraging landowners to develop through increased taxation while simultaneously preventing development [through planning restrictions], which would be politically untenable.”
Third, the taxation rates are crucial, and unless the taxation rate is penal, landowners would not have sufficient incentives to develop the land, as some land value would still be available to capture. However, imposing a penal tax rate on land values would be politically difficult.
Interviewees also highlighted the necessity of having clear objectives for the implementation of a land value tax. They argued that a land value tax for revenue generation would run into jurisdictional issues. Landowners living outside a revenue area may not receive commensurate benefits from the tax and may object to the tax itself. On the other hand, if such a tax is intended for redistributive purposes, it would have to be imposed nationally rather than locally.
Morgan and Shahab’s research highlights the fact that while land value taxes are more efficient and equitable in theory, the practice of implementing such a tax is subject to the same kinds of political negotiations and implementation constraints that other taxes suffer from.
These difficulties have been corroborated in cities that have tried to faithfully implement Henry George’s idea of a single land tax to the exclusion of others. Altoona, a city in Pennsylvania, United States, adopted a municipal tax system that shifted from property taxes to land value taxes in 2011. In 2016, the city discarded the practice because the tax never generated sufficient revenues to offset the loss of property taxes
Pennsylvania, being Henry George’s home state, was one of the few U.S. states to adopt a land value tax. According to S.C. Bourassa in “Land Value Taxation: Theory, Evidence, and Practice” (eds. R.F. Dye and R.W. England 2009), the land value tax experiment failed in Pittsburgh, Pennsylvania, because “the enterprising use of land value taxation was unfortunately combined with substandard assessment practices. An overdue reassessment of property in Allegheny County in 2000–2001 led to substantial increases in assessed land values and tax bills…. In the end, land value taxation in Pittsburgh was the scapegoat for infrequent and inaccurate assessments and clumsy rate-setting procedures that did not adequately adjust taxes in response to large increases in value.”
The literature reviewed in this essay is consistent when it comes to the theoretical appeal of a land value tax as an efficient, less distortionary, and more equitable tax system relative to existing systems of income and property tax. This literature is equally consistent about the difficulties of implementing a land value tax. It documents in detail the nuances to be kept in mind while considering the tax burden of a land value tax based on the income distribution and asset portfolios of households. It also highlights the political and administrative difficulties of assessing and persisting with a land value tax system and points out quite clearly the reasons for the demise of this system, even in countries where it has been enthusiastically applied.
At the same time, the literature reviewed implicitly highlights the degree to which incumbent landowners oppose land value taxation and the kinds of constraints proponents and administrators face when adopting a land value tax. It also shows that, while a land value tax system may be difficult to implement, the economic rent accruing to landowners does need to be taxed through different mechanisms for achieving planning objectives as well as redistributive goals. This literature focuses on an important problem at a time when relative economic inequality has become politically salient, and the lessons from the implementation of land value taxation must be studied carefully in order to find measured responses to this issue.
—By Anirudh Burman