Wednesday, March 11, 2009

Taxes, Spending, and Unemployment

Government interventions such as unemployment insurance may explain the chronic unemployment issues in Europe. Below are some additional resources that look at employment levels as they relate to government policies in European countries.

Economic Inquiry, 2008, vol. 46, issue 2, pages 197-207

Abstract: "We develop and calibrate a theoretical model that explains per capita hours worked and output growth as a function of three fiscal policy variables. differences in income taxes, productive government expenditures, and nonemployment transfers are sufficient to answer the question why Europeans work (much) less than Americans and why some Europeans work less than others. Differences in taste for leisure have little role to play given the actual variation of these three policy variables." ("JEL" E24, E62, J22, O41) Copyright (c) 2007 Western Economic Association International.


Why Do Americans Work So Much More Than Europeans?
Federal Reserve Bank of Minneapolis Quarterly Review
Vol. 28, No. 1, July 2004, pp. 2–13

Americans now work 50 percent more than do the Germans, French, and Italians. This was not the case in the early 1970s, when the Western Europeans worked more than Americans. This article examines the role of taxes in accounting for the differences in labor supply across time and across countries; in particular, the effective marginal tax rate on labor income. The population of countries considered is the G-7 countries, which are major advanced industrial countries. The surprising finding is that this marginal tax rate accounts for the predominance of differences at points in time and the large change in relative labor supply over time.


Some Observations on the Great Depression


The Great Depression in the United States was largely the result of changes in economic institutions that lowered the normal or steady-state market hours per person over 16. The difference in steady-state hours in 1929 and 1939 is over 20 percent. This is a large number, but differences of this size currently exist across the rich industrial countries. The somewhat depressed Japanese economy of the 1990s could very well be the result of workweek length constraints that were adopted in the early 1990s. These constraints lowered steady-state market hours.


The Marxian view is that capitalistic economies are
inherently unstable and that excessive accumulation of
capital will lead to increasingly severe economic crises.
Growth theory, which has proved to be empirically successful,
says this is not true. The capitalistic economy is
stable, and absent some change in technology or the rules
of the economic game, the economy converges to a constant
growth path with the standard of living doubling
every 40 years. In the 1930s, there was an important
change in the rules of the economic game. This change
lowered the steady-state market hours. The Keynesians had
it all wrong. In the Great Depression, employment was not
low because investment was low. Employment and investment
were low because labor market institutions and
industrial policies changed in a way that lowered normal