Alternative to Mankiw’s View on Tax Incentives and Work: Maybe Europeans Want More Free Time

September 15, 2021

Greg Mankiw warned New York Times readers about the dangers of adopting the Biden agenda and moving more towards a European-style welfare state. In his piece, titled “Can America Afford to be a Major Welfare State,” Mankiw noted:

“Compared with the United States, G.D.P. per person in 2019 was 14 percent lower in Germany, 24 percent lower in France and 26 percent lower in the United Kingdom.

“Economists disagree about why European nations are less prosperous than the United States. But a leading hypothesis, advanced by Edward Prescott, a Nobel laureate, in 2003, is that Europeans work less than Americans because they face higher taxes to finance a more generous social safety net.”

While Prescott and Mankiw attribute the gap in annual work hours between Europe and the United States to the disincentive created by higher European taxes, there is an alternative explanation: Europeans workers may just want to have more leisure time and they have the political power to impose their will.

Supporting this view is the fact that the European welfare states all mandate far more paid time off than the United States. Germany mandates that workers get 20 days a year of paid vacation, in addition to 13 paid holidays. The Netherlands also mandates 20 days of paid vacation, in addition to 9 paid holidays. Demark mandates 25 days of paid vacation and 9 paid holidays. These countries also all mandate paid sick leave and paid family leave.

In other words, it is not simply that individuals are looking at the tax code and deciding to work less, parliaments are writing laws that guarantee most workers more leisure and less work. This is because politicians win elections based on the promise of more leisure and less work.

It’s true, as Mankiw points out, that Europeans on average have lower incomes than people in the United States, but this is largely because they have made a political decision that they prefer more leisure time to higher incomes. (The gap in income for the typical worker is almost certainly not as large as the gap in the average income, since there is less income inequality in Europe.)

Mankiw may think that it’s better for people to work more and have more money, but apparently people in Europe think otherwise. Since several states and cities have mandated paid family leave and sick leave in recent years, it may be the case that people in the United States also disagree with Mankiw.  


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