work and leisure in the us and europe: why so different? alesina, glaeser and sacerdote, working...
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Work and Leisure in the US and Europe: Why so Different?
Alesina, Glaeser and Sacerdote, Working paper
Why Do Americans Work So Much More Than Europeans?
Prescott, Working paper
Google scholar cites: 358
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Summary
• Americans now work substantially more than Europeans; wasn’t true 40 years ago
• Prescott studies a simple representative agent model
• Finds that taxes can explain all the differences in labor supply
• I will augment Prescott’s work with other info, especially from Alesina, Glaeser and Sacerdote (henceforth AGS, 2005)– Also, some cameos by Dew-Becker and Gordon, 2007
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US vs EU E/N
0.30
0.35
0.40
0.45
0.50
0.55
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Em
plo
ymen
t-P
op
ula
tio
n R
atio
0.80
0.85
0.90
0.95
1.00
1.05
1.10
1.15
1.20
1.25
EU
-US
rat
io
US
EU-15
Ratio(Right hand axis)
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Raw Data for Hours Per Employee
1500
1600
1700
1800
1900
2000
2100
2200
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
US
EU-15
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The basic facts
• European labor supply fell throughout the postwar period– Both intensive and extensive margins
• EU labor productivity caught up to the US
• Output per capita never gained
• Prescott’s question: what explains the changes in employment?
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The theory
• Standard RBC framework,
– Where c is consumption, h is hours
• Highly stylized, but a reasonable starting point– Unit IES, no wealth effects on labor supply
• α is key in determining labor supply
0
100loglogmaxt
ttt hcE
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Budget Constraint:
– tc, tax on consumption
– tx, investment tax; x investment; δ depreciation
– th, marginal tax on labor
– tk, capital income tax
– Tt, transfers; Gov’t gives all the tax revenue back
• The key is the price of consumption relative to leisure; depends on tc and th
ttttktth
txtc
Tkkrhw
xc
11
11
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Key equilibrium conditions
• Labor supply:
• Wage:
• Elasticity of hours wrt wages:– Prescott calibrates α to match the average
level of employment– Elasticity is 0.77– This is roughly the same number one gets by
regressing employment on taxes
wc
h
1
/1
1/
hkw /1
wht
z
11
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Labor Taxes in Europe
25
27
29
31
33
35
37
39
41
1980 1985 1990 1995 2000
10
15
20
25
30
35
40
45
Anglo-Saxon
(right hand axis)
Continental
Nordic
Mediterranean
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Taxes on second earners
• Labor supply increase in the US between ’70 and ’93 is entirely driven by married women– Single women are a small part of the working
age population…
• 1986 tax reform reduced taxes on second earners (see next slide)
• A similar reform in Spain raised labor supply by 12 percent
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AGS on labor supply elasticity
• Note that α governs both the level of employment and the elasticity wrt taxes– The elasticity is zero if you have no unearned income
• Prescott’s η=0.77• Labor literature says
– ηmen ≈ 0 (upper bound 0.35)– ηwomen ≈ 1
• AGS argue taxes explain at most half the gap between US and Europe
wht
z
11
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0
0.2
0.4
0.6
0.8
1
1.2
15 to 19 20 to 24 25 to 34 35 to 44 45 to 54 55 to 64 65+
EU-15Tortoises
Middle Countries
E/N Ratio to the US
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50
55
60
65
70
75
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003
Fixed Policy
Predicted
No Post-1995 Dummy
Male Employment
Effect of the post-95 dummy (6.32%)
Effect of the Policy variables (1.47%)
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35
37
39
41
43
45
47
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003
Fixed Policy
Predicted
No Post-1995 Dummy
Female Employment
Effect of the post-95 dummy (2.38%)
Effect of the Policy variables (1.75%)
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AGS’s Alternative Hypothesis
• One way to read the results is that there is a big macro elasticity but a small micro elasticity
• Maybe there are complementarities that magnify micro effects
• AGS argue for complemetarity in leisure– We all coordinate on the weekend– Women happier staying home if they have friends– We want vacation at the same time
• Then unions and gov’t may have a place in solving coordination problems
• Prescott may be right for the wrong reasons
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The Social Multiplier• A social multiplier assumes that the value
of leisure depends on the leisure taken by others
• Social multiplier means V12>0
• Let
• Then the social multiplier is 2v1/(2v1-v2)
• v1>v2 implies social multiplier < 2
• Too small for micro elasticities to account for macro regressions
)ˆ1,1())1)(1(( llVwtlUU
)ˆ1)(1()1()1()ˆ1,1( 22
10 llvlvlvllV
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Some suggestive evidence
• People take weekends off together
• People tend to work 9–5 instead of staggering shifts
• Holidays are grouped together
• Social multiplier might come from increasing returns in work (e.g. Ciccione and Hall)
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• However, AGS settle on 0.2 as a reasonable micro estimate of LS elasticity
• A maximum social multiplier of 2 implies a macro elasticity of 0.4– The 0.2 estimate probably includes multiplier effects
already anyway
• Prescott overstates the case – taxes explain at best half the LS difference– And for him to be right, unions and hours limits must
be optimal!
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What are the alternative explanations?
• Many policy differences between EU and US– Implicit taxes on earnings after retirement age– Unemployment benefits– Tax rates on second earners– Employment protection legislation– Product market regulation
• If Prescott is right, they don’t matter
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Employment Protection Legislation
0
0.5
1
1.5
2
2.5
3
3.5
4
1980 1985 1990 1995 2000
Anglo-Saxon
Continental
Nordic
Mediterranean
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A policy proposal
• Suppose we take Prescott’s parameters as given– I.e. the macro elasticity is causal, maybe due to a
social multiplier
• Now we can go from a pay-as-you-go to fully funded social security– Not possible with fixed labor supply
• Proposal: allow people to lower their tax rate by 8.7% and put it in a retirement account– Intuition: leads people to work substantially more– This only works by stopping redistribution
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• Sets up a big OG model:– Wages grow at 2% per year– People work from age 22 to 63– SS benefits equal 32% of wages at retirement– Prevailing marginal tax is 40%
• Then simulates the effect of the proposed policy change
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The effects of employment on productivity
• Historically, productivity tends to grow quickly when labor is scarce– Habakkuk hypothesis– Clark paper on cotton mills– US postwar experience
• Does this explain the recent experience of Europe?– Employment rises post-1995, but productivity
slows
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Productivity Regressions• Instrument for
employment changes with labor taxes
• Coefficient on employment is twice what we would expect
• EPL and ARR have independent positive effects on productivity
Employment Rate -0.64***(0.20)
Output Gap 0.68***(0.11)
Product Market 0.56Regulation (0.45)
Union Density 0.03(0.12)
Employment 1.66***Protection Legislation (0.65)
Unemployment 0.14***Benefits (ARR) (0.05)
High Corpratism Dummy -0.49(0.94)
Post-1995 Dummy -0.14(0.24)
R2 0.63RMSE 0.95N 320
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Conclusions
• Prescott is provocative• Nice implementation of a canonical theory• AGS show that his results are probably too
strong– Taxes explain at most half the variation in LS– Why rule out all the other things Europe does
wrong?
• The strong macro elasticities imply policies limiting employment may be efficient
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Labor’s share of income
0.580
0.600
0.620
0.640
0.660
0.680
0.700
0.720
0.740
0.760
1980 1985 1990 1995 2000
EU-15
US
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Labor’s share of income
0.580
0.600
0.620
0.640
0.660
0.680
0.700
0.720
0.740
0.760
1980 1985 1990 1995 2000
France
Germany
UK