Over the last fifty years, the labor market of the major European countries went through a remarkable transformation: while Europeans worked 15% more than Americans in 1956, as measured by total hours of work per capita (15-64 years old), they now work 30% less. Richard Rogerson looks at this evidence, details it further and offers some explanations.
Looking more closely at the data by sector, he observes that while the service sector saw no change in relative hours between both regions, the good producing sector saw large shifts in Europe. Thus understanding the structural reallocation of labor across sectors during this period is crucial.
In early stages of development, an economy devotes more hours to good producing and less to services. As it catches up, like Europe did in the post-war period, it shifts labor from the goods sector to the service sector. By 2000, output per hour is similar in both regions, yet the European service sector is 35% smaller. Why?
Richard Rogerson ties this to the development process and taxation. Using a calibrated model with a home service sector (production of services at home as an alternative to buying them on the market), he shows that while technological progress allows a greater allocation of labor into the service sector, the increasing taxes drive this additional labor into the home service sector instead of the market service sector.
Is this good? Before arguing that "Europeans have a better quality of life," consider this: who is more efficient at producing goods and services, an autarky or a specialized economy with trade? At least since Adam Smith we know that specialization is better. So, unless the provision of home services entails particular enjoyments compared to buying those services on the market, the American situation is better.