Working Paper: NBER ID: w26554
Authors: Alexander Bick; Nicola Fuchs-Schundeln; David Lagakos; Hitoshi Tsujiyama
Abstract: Why are average hours worked per adult lower in rich countries than in poor countries? We consider two natural explanations: income effects in preferences, in which leisure becomes more valuable when income rises, and distortionary tax systems, which are more prevalent in richer countries. To assess the importance of these two forces, we build a simple model of labor supply by heterogeneous individuals and calibrate it to match international data on labor income taxation, government transfers relative to GDP, and hours worked per adult. The model predicts that income effects are the main driving force behind the decline of average hours worked with GDP per capita. We reach a similar conclusion in an extended model that matches cross-country patterns of labor supply along the extensive and intensive margins and of the prevalence of subsistence self-employment.
Keywords: labor supply; income effects; taxation; economic development
JEL Codes: E24; H20; J22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| income effects (H31) | decline of average hours worked (J22) |
| GDP per capita (O49) | decline of average hours worked (J22) |
| income effects (H31) | demand for leisure (J29) |
| decline of average hours worked (J22) | demand for leisure (J29) |
| tax and transfer systems (H87) | decline of average hours worked (J22) |
| labor productivity differences (J89) | decline of average hours worked (J22) |
| structural changes in labor supply (J29) | decline of average hours worked (J22) |
| transition from subsistence self-employment to market work (P23) | decline of average hours worked (J22) |