Impact of Taxes on Work and Leisure Choices in OECD Countries, 1956-2004

January 4, 2007

Contrary to the conventional wisdom that workers today are overworked and short on leisure, the average hours worked per person has been falling in many OECD countries since the mid-1950s. However, changes in work habits have varied widely across countries. While workers in the U.S., Canada and Australia worked almost the same number of hours today as they did in the 1950s (a ratio of hours worked in 2004 to 1956 of 1.01, 1.08 and 0.97, respectively), in countries like Germany, France and the United Kingdom workers are working much less these days than they used to (a 2004 to 1956 ratio of 0.60, 0.67 and 0.79, respectively).

What explains falling work hours in Western Europe, while work effort has remained steady in the U.S. and Canada? According to a new NBER working paper from Lee Ohanian (UCLA), Andrea Raffo (Federal Reserve Bank of Kansas City) and Richard Rogerson (University of Arizona), taxes play a surprisingly large role in these social changes. From the paper:

We document large differences in trend changes in hours worked across OECD countries over the period 1956-2004. We then assess the extent to which these changes are consistent with the intratemporal first order condition from the neoclassical growth model. We find large and trending deviations from this condition, and that the model can account for virtually none of the changes in hours worked. We then extend the model to incorporate observed changes in taxes. Our findings suggest that taxes can account for much of the variation in hours worked both over time and across countries.

The authors find that differences in business cycles and consumption patterns explain far less of these changes than tax policy does. Read the full paper here. Of course, these findings are consistent with previous research from Nobel Laureate Edward Prescott and other economists on the impact of tax policy on patterns of work and leisure.


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