Labour Taxes and Work Hours in Australia

In the 1970s, work hours in Europe were similar to work hours in the United States, but today Europeans work less than Americans. Prescott (2004) attributes the decline in European work hours to an increase in the effective marginal tax rate on labour income. Applying Prescott’s dynamic general equilibrium model to Australian labour market data confirms that the taxation of labour income is an important determinant of the decision to work. In this paper it is found that a temporary increase in taxes reduced Australian work hours in the 1980s, while taxes and work hours did not change much in the long-run. The resilience of Australian work hours in the 1990s suggests that a return to the tax rates of the 1970s would restore the European labour supply. 1