Work, Taxes, and Entitlements in America and Europe
About This Event

Why do Americans devote so much more time to working for pay than continental Europeans? Which population groups display the biggest differences in work activity across countries? Do taxes and entitlement programs explain the large national differences in work activity and their evolution over time? Richard Rogerson, a professor of Listen to Audio


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economics at Arizona State University, will present his recent work on the subject, and Gary Burtless, a senior fellow in economic studies at the Brookings Institution, will respond.

Agenda
1:45 p.m.
Registration
2:00
Speaker:
Richard Rogerson, Arizona State University
Discussant:
Gary Burtless, Brookings Institution
Moderator:
Steven J. Davis, AEI
4:00

Adjournment

Event Summary

May 2007

Work, Taxes, and Entitlements in America and Europe

Why do Americans devote so much more time to working for pay than continental Europeans? Which population groups display the biggest differences in work activity across countries? Do taxes and entitlement programs explain the large national differences in work activity and their evolution over time? Richard Rogerson, a professor of economics at Arizona State University, presented his recent work on the subject, and Gary Burtless, a senior fellow in economic studies at the Brookings Institution, responded. This event took place at AEI on May 1, 2007.

Richard Rogerson,
Arizona State University

Member countries of the Organisation for Economic Co-operation and Development look similar by most statistical measurements, but for working hours there are dramatic differences. To comprehend these discrepancies it is important to understand the factors that contribute to hours worked. Personal preferences for work versus leisure, taxation policy, labor/product regulations, and the presence of unions each play an integral role in determining how many hours a person will elect to work each year.

On average, U.S. laborers work more hours than those in every European country, with Germany, Belgium, France, and Italy having particularly undemanding schedules. One possible culprit for the difference in hours is tax rates. The average effective labor tax is important in determining how many hours are worked and is much higher in some European countries than it is in the United States. Higher taxes do not necessarily lead to fewer hours worked in every case, however, so we must pay attention to finer details. Government actions such as subsidy distribution can have a large effect on worker preferences as well.

Examining specific details of taxation and government action is important in analyzing the differences across countries in hours worked.
 
Gary Burtless
Brookings Institution

It is unlikely that taxes have as large an impact on changes in hours worked as suggested previously. Tax schedules tax higher incomes more have a more important effect on labor supply.

Workers evaluate their personal preferences in order to make the best compromise along an hours worked versus earnings line. Evidence shows that when considering this line historically, technology wedges that increase worker earnings per hour are cancelled out by increasingly large tax wedges and therefore should not impact labor supply. There must be factors beyond taxation that influence hours worked.

Governments are responsible for many changes in hours worked due to subsidies created for either work or leisure. Government transfers like college scholarships will decrease the labor supply while child-care benefits for workers can cause laborers to work more. The combination of personal benefits for private and public consumption plays an important role in determining hours worked in each country.

High taxes have a surprisingly strong correlation with economic growth. A higher tax may cause a country to lose 1 percent of its labor supply, but there may be a higher increase in capacity for production. More often than not, high-wage workers will more than make up for low-wage workers who may decrease their hours worked due to a tax increase. Effects of higher taxation tend to cancel out in the end, while government spending can significantly sway worker preferences. Taxation is not the determining factor in hours worked.

AEI intern Douglas Wigley prepared this summary.

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AEI Participants

 

Steven J.
Davis
  • Steven J. Davis studies unemployment, job displacement, business dynamics, the effect of taxes on work activity, and other topics in economics. He is deputy dean for the faculty and professor of international business and economics at the University of Chicago Booth School of Business, a research associate at the National Bureau of Economic Research, and an economic adviser to the U.S. Congressional Budget Office.  He previously taught at Brown University and MIT.  As a visiting scholar at AEI, Mr. Davis studies how policy-related sources of uncertainty affect national economic performance.

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