Where Do Differences in Hours Worked Come From?

The immediate question is, why do people work more in the United States? A natural place to look for explanations is the labor supply decisions of households. One possibility is simply that the tastes of US and European households are different. Perhaps Europeans prefer having fewer goods and more leisure. Although this is possible, economists prefer to start from the presumption that people have broadly similar tastes and look first to see if there are other plausible explanations. The differences in hours worked are not explained by Europeans having poorer technology. Both the United States and European countries are highly developed, so technologies used in one country are used in the others as well. Supporting this is the fact that, as we already noted, productivity does not appear to be lower in Europe. Another candidate explanation is that there are differences in the tax system. shows an individual labor supply curve—in either Europe or the United States. Notice in the wage on the vertical axis is the real wage after taxes. This is defined as follows: real wage after taxes = real wage × (1 − tax rate). In this equation, the tax rate is a marginal tax rate. This means that it is the tax paid on the extra amount you earn if you work a little bit more. Suppose the tax rate is 0.40 and your shows that an increase in the after-tax real wage will cause an individual to supply more time to the market and thus consume less time as leisure. The increase in the wage creates an incentive for the individual to substitute away from leisure because it has become more costly. Suppose that we compare two identical individuals in Europe and the United States. If the marginal tax rate in Europe is higher than it is in the United States, then the after-tax wage in Europe will be smaller. Since labor supply is upward sloping, individuals in Europe will work less than individuals in the United States.