Why Do Americans Work So Much More Than Europeans?

By Prescott, Edward C. | Federal Reserve Bank of Minneapolis Quarterly Review, July 2004 | Go to article overview

Why Do Americans Work So Much More Than Europeans?


Prescott, Edward C., Federal Reserve Bank of Minneapolis Quarterly Review


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. This article examines the role of taxes in accounting for the differences in labor supply across time and across countries; in particular, the effective marginal tax rate on labor income. The population of countries considered is the G-7 countries, which are major advanced industrial countries. The surprising finding is that this marginal tax rate accounts for the predominance of differences at points in time and the large change in relative labor supply over time.

Americans, that is, residents of the United States, work much more than do Europeans. Using labor market statistics from the Organisation for Economic Co-operation and Development (OECD), I .nd 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 article, 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 them.

This finding has important implications for policy, in particular, for financing public retirement programs, such as U.S. Social Security. On the pessimistic side, one implication is that increasing tax rates will not solve the problem of these underfunded plans, because increasing tax rates will not increase revenue. On the optimistic 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 the increased output.

The major advanced industrial countries (the G-7 countries) are the European countries France, Germany, Italy, and the United Kingdom, plus Canada, Japan, and the United States. Comparable and sufficiently good statistics for these countries 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 parity gross domestic product (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/dot-com 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 earlier period was selected because it is the earliest one for which sufficiently good data are available to carry out the analysis. The relative numbers after 2000 are pretty much the same as they were in the pretechnology boom period 1993-96.

I emphasize that my labor supply measure is hours worked per person aged 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 works. Paid vacations, sick leave, and holidays are hours of nonworking time. Time spent working in the underground economy or in the home sector is not counted. Other things equal, a country with more weeks of vacation 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 for which the resulting labor income is taxed.

Table 1 reports the G-7 countries' output, labor supply, and productivity statistics relative to the United States for 1993-96 and 1970-74. …

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