Lei Fang and Fang Yang
Working Paper 2021-7b
January 2021 (Revised October 2022)
Abstract: We document large differences between the United States and Europe in allocations of expenditures and time for both market and home activities. Using a life-cycle model with home production and endogenous retirement, we find that the cross-country differences in consumption tax, social security system, income tax, and total factor productivity (TFP) together can account for from 68 to 95 percent of the cross-country variations in aggregate hours and expenditures. These factors can also account well for the cross-country differences in allocations by age and generate substantially lower market hours in Europe for the age group of 60 and above as in the data. All the factors, except income tax, are quantitatively important for determining cross-country differences in expenditure allocations. Although the differences in social security system and income tax are crucial in explaining the difference in market hours around retirement ages, TFP and consumption tax are more important for the difference in market hours for prime ages.
JEL classification: E21, E62, J22, O57, H31
Key words: consumption expenditure, home production, labor supply, fiscal policy
The authors are grateful to Mariacristina De Nardi, Richard Rogerson, Gustavo Ventura, and seminar participants at the Federal Reserve System Brown Bag, the summer 2020 meetings of the European Economic Association, the 2020 annual meeting of the Southern Economic Association, the US Bureau of Economic Analysis, Peking University, the 2021 annual meeting of the Society for Economic Dynamics, the 2021 annual meeting of the Southern Economic Association, and the BSE Summer Forum Workshop on Macroeconomics and Social Insurance in 2022 for useful comments. They thank Nicholas A. Wright, Kenneth Castellanos, and Andrew Ahn for providing excellent research assistance. The views expressed are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Atlanta or the Federal Reserve System.
Please address questions regarding content to Lei Fang, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309; or Fang Yang, Department of Economics, Louisiana State University, Business Education Complex, Room 2300, Baton Rouge, LA 70803-6306.
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