Taxes and Market Work: A Cross-Country Comparison

Article excerpt

Time devoted to work varies greatly among OECD countries. In Belgium, France, and Germany for example, total hours of market work relative to population are roughly 30 percent lower than in the United States, Japan, and Australia. The issue is not simply one of "European" versus "non-European" countries, as there are also large differences within Europe. Hours of work in Spain and Sweden are roughly midway between the two previously mentioned groups, and in Switzerland, hours of work are almost the same as in the United States. These differences dwarf the changes in hours of work that are associated with typical business cycle fluctuations. Because labor is one of the key inputs in production, time devoted to market work is a key determinant of the material well being of individuals in an economy. Identifying the factors that lead to such different outcomes in apparently similar economies promises important insights relevant for many public policy discussions.

Time-Series Changes

As a first step, it is informative to look at the evolution of hours of work over time. Have these large differences been around for decades, or are they a more recent phenomenon? The answer to this question should provide important information about where to look for possible explanations. It turns out that these differences have not always been present. Comparable data exist going back to the mid-1950s, and at that time, hours of work in France and Germany were actually higher than they were in the United States. Specifically, whereas hours of work in the United States today are roughly similar to what they were in the mid-1950s, in France and Germany they have declined by more than 35 percent. The timing of this decline is also of interest--the pattern that one finds in these countries (as well as many others) is that there is a relatively constant rate of decline from the mid-1950s and lasting through the mid-1980s, at which time hours of work tend to flatten out. (1) The time-series analysis suggests that the key to understanding why hours of work are so different across countries today is to understand why hours of work have changed so differently across countries since the mid-1950s.

A Digression: A Comparison with Unemployment Evolutions

The relationship between differences in hours of work across countries and differences in unemployment across countries is also noteworthy. A large literature has documented and studied the fact that unemployment in many European countries exceeds that in the United States, and that this difference has emerged over the last 30 years. Is that observation just another way of presenting the same information? The answer is a resounding "no." In a 2006 paper (2), I document that from a pure accounting perspective only a very small fraction of the differences in hours of work are explained by differences in unemployment. For example, if we transferred unemployed workers in France into employment to reduce the unemployment rate in France to the U.S. level, and we had these workers work the same number of hours as the average French worker, then the difference between hours of work in France and the United States would drop from around 30 percent to around 27 percent.

Labor Taxes as a Driving Force

The time-series evidence has important implications for screening the potential forces behind the quite different time-series changes in hours worked across countries. In particular, we are looking for driving forces that change at a fairly steady rate from the mid-1950s to the mid-1980s, exhibit sizeable differences in the extent of this change across countries, and are plausibly linked to labor supply. One obvious candidate is labor taxes (including payroll taxes and consumption taxes in addition to labor income taxes). On the theoretical side, basic economic theory tells us that labor taxes used to fund transfer payments, either in kind or monetary, create a disincentive for individuals to work. …