FEDERAL RESERVE BANK OF MINNEAPOLIS
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Why Do Americans Work
So Much More Than Europeans?
*
Edward C. Prescott
Senior Monetary Adviser
Research Department
Federal Reserve Bank of Minneapolis
and W.P. Carey Chair
Department of Economics
Arizona State University
Americans, that is, residents of the United States, work
much more than do Europeans. Using labor market sta-
tistics from the Organisation for Economic Co-operation
and Development (OECD), I find 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 compari-
sons 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 sta-
tistics 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 par-
ity 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
*This is the 2002 Erwin Plein Nemmers Prize in Economics lecture, presented
April 21, 2003, at Northwestern University. The author thanks Sami Alpanda,
Simona Cociuba, T. C. Tong, and Alexander Ueberfeldt for excellent research as-
sistantship, as well as the participants at lectures at Berlin, the Bank of England,
Industry Canada, Tokyo University, the University of Toulouse, and the University
of Illinois. The financial support of the National Science Foundation under SES
9986667 is also acknowledged.
1
For Italy, GDP is reduced by 20 percent because Italy’s GDP statistics include
estimates of the underground untaxed economy. The theory is concerned with the
above-ground taxed economy, and I want GDP for this sector. This is why I do not
follow Maddison (1995, pp. 241–50) and increase the OECD labor supply numbers
by 16.0 percent in the 1970–74 period and 17.6 percent in the 1993–96 period.
Why Americans Work So Much
Edward C. Prescott
3
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 sec-
tor. 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 sup-
ply, and productivity statistics relative to the United
States for 1993–96 and 1970–74. The important obser-
vation for the 1993–96 period is that labor supply (hours
per person) is much higher in Japan and the United States
than it is in Germany, France, and Italy. Canada and the
United Kingdom are in the intermediate range. Another
observation is that U.S. output per person is about 40
percent higher than in the European countries, with most
of the differences in output accounted for by differences
in hours worked per person and not by differences in
productivity, that is, in output per hour worked. Indeed,
the OECD statistics indicate that French productivity is
10 percent higher than U.S. productivity. In Japan, the
output per person difference is accounted for by lower
productivity and not by lower labor supply.
Table 1 shows a very different picture in the 1970–74
period. The difference is not in output per person. Then,
European output per person was about 70 percent of the
U.S. level, as it was in 1993–96 and is today. However,
the reason for the lower output in Europe is not fewer
market hours worked, as is the case in the 1993–96
period, but rather lower output per hour. In 1970–74,
Europeans worked more than Americans. The exception
is Italy. What caused these changes in labor supply?
Theory Used
To account for differences in the labor supply, I use the
standard theory used in quantitative studies of business
cycles (Cooley 1995), of depressions (Cole and Ohanian
1999 and Kehoe and Prescott 2002), of public finance
issues (Christiano and Eichenbaum 1992 and Baxter
and King 1993), and of the stock market (McGrattan
and Prescott 2000, 2003 and Boldrin, Christiano, and
Fisher 2001). In focusing on labor supply, I am follow-
ing Lucas and Rapping (1969), Lucas (1972), Kydland
and Prescott (1982), Hansen (1985), and Auerbach and
Kotlikoff (1987).
This theory has a stand-in household that faces a
labor-leisure decision and a consumption-savings de-
cision. The preferences of this stand-in household are
ordered by
(1)
Variable c denotes consumption, and h denotes hours of
labor supplied to the market sector per person per week.
Time is indexed by t. The discount factor
0 < <
�
1
Table 1
Output, Labor Supply, and Productivity
In Selected Countries in 1993–96 and 1970–74
Relative to United States
(U.S. = 100)
Output Hours Worked Output per
Period Country per Person* per Person*
Hour Worked
1993–96 Germany
74 75
99
France
74
68
110
Italy
57
64
90
Canada
79
88
89
United Kingdom 67
88
76
Japan
78
104
74
United States 100
100
100
1970–74 Germany
75
105
72
France
77
105
74
Italy
53
82
65
Canada
86
94
91
United Kingdom 68
110
62
Japan
62
127
49
United States 100
100
100
*These data are for persons aged 15–64.
Sources: See Appendix.
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