Sunday, January 17, 2010

WHY DO AMERICANS WORK SO MUCH MORE THAN EUROPEANS?

Abstract

Americans now work 50 percent more than do the Germans, French, and Italians. This was not the case in the early 1970s when the Western Europeans worked more than Americans. In this paper, I examine the role of taxes in accounting for the differences in labor supply across time and across countries, in particular, the effect of the marginal tax rate on labor income. The population of countries considered is that of the G-7 countries, which are the major advanced industrial countries. The surprising finding is that this marginal tax rate accounts for the predominance of the differences at points in time and the large change in relative labor supply over time with the exception of the Italian labor supply in the early 1970s. This finding has important implications for policy, in particular for making social security programs solvent.

Americans, that is, residents of the United States, now work much more than do Europeans. Using labor market statistics from the Organisation for Economic Co-operation and Development (OECD), I find that Americans on a per person aged 15-64 basis work in the market sector 50 percent more than do the French. This was not always the case. In the early 1970s, Americans allocated less time to the market than did the French. The comparisons between Americans and Germans or Italians are the same. Why are there such large differences in labor supply across these countries? Why did the relative labor supplies change so much over time? In this lecture, I determine the importance of tax rates in accounting for these differences in labor supply for the major advanced industrial countries and find that tax rates alone account for most of these differences in labor supply.

This finding has important implications for policy in particular for financing social security retirement programs in Europe. On the pessimistic side, one implication is that increasing tax rates will not solve the problem of these under funded plans, because increasing tax rates will not increase revenue. On the positive side, the system can be reformed in a way that makes the young better off while honoring promises to the old. This can be accomplished by modifying the tax system so that when an individual works more and produces more output, the individual gets to consume a larger fraction of this increase output.

The major advanced industrial countries, which used to be called the G-7 countries, are the European countries France, Germany, Italy, and the United Kingdom, plus Canada, Japan, and the United States. For these countries comparable and sufficiently good statistics are available to carry out this investigation. The data sources are the United Nations system of national accounts (SNA) statistics and the OECD labor market statistics and purchasing power GDP numbers.1 The periods considered are 1970–74 and 1993–96. The later period was chosen because it is the most recent period prior to the U.S. telecommunications/dotcom boom of the late 1990s, a period when the relative size of unmeasured output was probably significantly larger than normal and there may have been associated problems with the market hours statistics. The early period was selected because it is the earliest one for which sufficiently good data are available to carry out the analysis. The relative numbers subsequent to 2000 are pretty much the same as they were in the pre technology boom period 1993-96.

I emphasize that my labor supply measure is hours worked per person 15-64 in the taxed market sector. The two principal margins of work effort are hours actually worked by employees and the fraction of the working age population that work. Paid vacations, sick leave, and holidays are hours of non working time. The time of someone working in the underground economy or in the home sector is not counted. Other things equal, a country with more weeks of vacations and more holidays will have a lower labor supply in the sense that I am using the term. I focus only on that part of working time that the resulting labor income is taxed.

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