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Monday, July 10, 2006

Labor Supply in Europe and the U.S.

Recently, I posted a column by Heleen Mees of Project Syndicate called "Does Europe Have a Leisure Trap?" The column claims that the difference between work hours for women in Europe and the U.S. is due to higher tax rates in Europe needed to support the welfare state. Greg Mankiw supported the claims in the Mees column and followed up today with tax rates in the Europe and U.S.:

Tax Rates Around the World, by Greg Mankiw: In a previous post, I suggested that the women in Europe may work less in the market and more at home because of higher tax rates. After reading some of the comments, I thought that blog readers might like to see some data on tax rates.

Here are the marginal tax rates as estimated by Ed Prescott for the 1990s:

Germany .59
France .59
Italy .64
Canada .52
United Kingdom .44
Japan .37
United States .40

These figures include both income taxes and consumption taxes, such as the VAT. Both types of tax distort the consumption-leisure tradeoff (and the tradeoff between market work and home work).

If a person earns a dollar in the marketplace, she gets to consume 60 cents of goods and services in the United States, but only 41 cents in Germany and France, and 36 cents in Italy. These are large differences in incentives to work.

That's interesting, but I hope he will take the next step and show that the tax rates actually affect labor supply. I assume such papers exist or Greg wouldn't have made this claim, but I am unaware of the papers he has in mind and would like to take a look at them. The work I am aware of, e.g. work by two of Mankiw's colleagues at Harvard discussed a year ago by Paul Krugman in a column called "French Family Values," is not supportive of the assertion that tax rates matter:

I've been looking at a new study of international differences in working hours by Alberto Alesina and Edward Glaeser, at Harvard, and Bruce Sacerdote, at Dartmouth. The study's main point is that differences in government regulations, rather than culture (or taxes), explain why Europeans work less than Americans.

But the study also suggests that in this case, government regulations actually allow people to make a desirable tradeoff -- to modestly lower income in return for more time with friends and family -- the kind of deal an individual would find hard to negotiate. The authors write: ''It is hard to obtain more vacation for yourself from your employer and even harder, if you do, to coordinate with all your friends to get the same deal and go on vacation together.''

And they even offer some statistical evidence that working fewer hours makes Europeans happier, despite the loss of potential income.

It's not a definitive result, and as they note, the whole subject is ''politically charged.'' But let me make an observation: some of that political charge seems to have the wrong sign.

American conservatives despise European welfare states like France. Yet many of them stress the importance of ''family values.'' And whatever else you may say about French economic policies, they seem extremely supportive of the family as an institution. Senator Rick Santorum, are you reading this?

So, apparently the extra 19 cents per dollar French workers pay buys them something valuable, something more than worth the difference in taxes. Also, as noted on the original post on this, the 2003 paper is "Women in the Labour Force: How Well is Europe Doing?," by Christopher Pissarides, Pietro Garibaldi, Claudia Olivetti, Barbara Petrongolo and Etienne Wasmer does not support the hypothesis either (e.g the paper says "[W]ith some important exceptions, e.g., in the provision of subsidised child care, there are no clearcut correlations between female employment rates and measurable features of the welfare state. ..." contrary to the claims in the Mees project Syndicate article).

    Posted by on Monday, July 10, 2006 at 10:28 AM in Economics, Policy, Politics, Regulation, Unemployment | Permalink  TrackBack (0)  Comments (68)

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