1. 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

2. 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

3. US vs EU E/N

4. Raw Data for Hours Per Employee

6. 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?

7. 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

8. Budget Constraint: –t c, tax on consumption –t x, investment tax; x investment; δ depreciation –t h, marginal tax on labor –t k, capital income tax –T t, transfers; Gov’t gives all the tax revenue back The key is the price of consumption relative to leisure; depends on t c and t h

9. 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

10. Labor Taxes in Europe

12. 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

14. 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 –η men ≈ 0 (upper bound 0.35) –η women ≈ 1 AGS argue taxes explain at most half the gap between US and Europe

15. E/N Ratio to the US

16. Male Employment Effect of the post-95 dummy (6.32%) Effect of the Policy variables (1.47%)

17. Female Employment Effect of the post-95 dummy (2.38%) Effect of the Policy variables (1.75%)

18. 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

19. The Social Multiplier A social multiplier assumes that the value of leisure depends on the leisure taken by others Social multiplier means V 12 >0 Let Then the social multiplier is 2v 1 /(2v 1 -v 2 ) v 1 >v 2 implies social multiplier < 2 Too small for micro elasticities to account for macro regressions

20. 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)

21. 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!

22. 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

23. Employment Protection Legislation

25. 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

26. 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

27. 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

28. 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

29. 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

30. Labor’s share of income