"What Drives Trends in Employment and Hours Worked per Worker? A Cross Country Analysis."

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Hours worked are fundamentally important for aggregate economic activity, and their long run trends diverge considerably in Europe versus the United States. Yet, canonical macroeconomic models even tax-inclusive ones fail at replicating these di¤ering trend behaviors. We develop a simple extension of the canonical macroeconomic model that decomposes trend hours into exten- sive and intensive margins via household-side employment-attainment costs and rm-side employment adjustment costs. Predictions of a tax-inclusive version of this model track very well the trend behavior of hours and its two underlying margins in both the United States and a host of European countries. The model shows that taxes and, in particular, capital taxes, impact the two margins of labor quite di¤erently. Therefore, if these margins are not disentangled the full impact of taxes on work hours does not come through. The model has im- plications related to the relative rigidity of labor markets across countries and also to international risk sharing that are in line with the data and, therefore, validate its structure. The model s success in tracking work hours in a range of countries suggests that it can be used as a laboratory to study a broad set of issues regarding the trend behavior of labor markets.
hours worked per population; inter- national risk-sharing wedge; labor-market policy; long-run labor wedge; taxes; U.S. tax puzzle.
What Drives Trends in Employment and Hours Worked per Worker? A Cross Country Analysis