NCPA - National Center for Policy Analysis

HIGHER TAX RATES REDUCE WORKING HOURS IN OECD COUNTRIES

May 18, 2007

In "Long-Term Changes in Labor Supply and Taxes: Evidence from OECD Countries, 1956-2004," co-authors Lee Ohanian, Andrea Raffo and Richard Rogerson assess the role of labor and consumption taxes in explaining differences in hours of work across 21 Organization for Economic Co-operation and Development (OECD) economies.  The author's key finding is differences in taxes across countries are a very important piece of the explanation for the vastly different levels of hours of market work.

  • The starting point for their analysis is the observation that the current differences in hours of work across countries can be traced to very different evolutions across countries over the last 50 years. 
  • Although, on average, hours of work have decreased substantially across OECD economies since 1956, what is particularly striking is the difference in the size of this decrease across economies. 
  • For example, hours of work in the United States were roughly the same in 1956 and 2004, while hours of work in Germany decreased by about 40 percent over this same period.
  • Their key finding is that, for many countries, increases in taxes play a large role in explaining why hours of work have decreased over time.

Although the authors find that, on average, changes in taxes explain the changes in hours of work, there are some episodes in particular countries that require another explanation. Specifically, in some instances hours decrease by more than what the changes in taxes can explain, while in some other cases hours decrease less than would be predicted solely on the basis of changes in taxes.  This work helps them to isolate those episodes that require additional attention.

Source: "Higher Tax Rates Reduce Working House in OECD Countries," NBER Digest, May 2007; based upon: Lee Ohanian, Andrea Raffo and Richard Rogerson, "Long-Term Changes in Labor Supply and Taxes: Evidence from OECD Countries, 1956-2004," National Bureau of Economic Research, Working Paper No. 12786, December 2006.

For text:

http://papers.nber.org/digest/may07/w12786.html 

For report:

http://papers.nber.org/papers/w12786 

 

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