Combining those two observations gives the wrong impression.
I was just reading his blog this morning and found two separate posts I thought might interest the thread. That's the only reason they appear together.
Here's more on the work hours study:
After testing various possible causes for these trends, Kuhn and Lozano conclude that many salaried men work longer because of an increase in "marginal incentives" to supply hours beyond the standard 40 per week. These workers don't immediately get overtime pay for the "extra" hours. But over a longer time period, they get a substantial reward in the possibility of earning a bonus or a raise within their current position, or they may win a promotion to a better job, or simply signal to the labor market that they are productive and ambitious and thus suitable for a better job in another firm. Alternatively, the longer hours may enable them to acquire extra skills or to establish networks and contacts that could be rewarded in their current firm or in another one. In addition, the long hours may enhance their prospect of keeping their current job if the firm decides to lay off workers in the future. Studies suggest that perceived job insecurity has risen substantially among highly educated workers.
As evidence, the authors note that an extra hour beyond 40/week was associated with a 1.2 percent increase in earnings for male workers overall between 1983 and 1985, and with more than a 2 percent increase by 2000-2. For salaried workers, the man putting in 55 hours per week in the early 1980s earned a weekly salary of 10.5 percent more than an equivalent worker putting in normal hours. By the early twenty-first century, that gap had more than doubled, to 24.5 percent. Such pay gaps, or "long-hours premiums," were accommodated by a markedly wider dispersion of earnings within an occupation between 1983 and 2002.
In their research, the authors are able to rule out several factors as explanations for this change in work behavior. It is not the result of changing techniques in the Current Population Survey, a survey that provides the statistical base for their study. It is not a purely cyclical phenomenon. Nor is it attributable to a changing mix of occupations and industries in the male labor force. It cannot be attributed to rising education levels, an aging workforce, or decreasing unionization. Nor can it be explained by the declining economic fortunes of American men over the past two decades. Real earnings for 40-hour weeks remained essentially flat among hourly male workers in the years between 1983-5 and 2000-2, and increased only slightly for salaried workers. Nor, the authors find, is the change a consequence of increased self-employment. And, it is not related to an increase in multiple jobholding, or to advances in communication technology (such as the Internet) that facilitate additional work from home.
And here's another interesting bit from the same blog. I had always scratched my head over the benefits of a consumption tax.
Consumption vs Income Taxation
In a previous post, I expressed a preference for consumption taxation over income taxation. In a comment, Daniel Demetri (an ec 10 student this past year) asks an important question about incentives:
I'm confused as to why a consumption tax does not affect incentives while an income tax does.... People don't care about saving money--they care about spending it.
With income tax: 1 hr work --> $16 pre-tax --> $8 post-tax --> $8 of chocolate cake, video games, and Red Sox tickets.
With consumption tax: 1 hr work --> $16 pre-tax --> $8 of chocolate cake, video games, and Red Sox tickets + $8 of tax.
The amount worked and the amount spent are the same, so what's the real difference?
Daniel is exactly right, as far as he goes. If we are looking at the decision to work today in order to consume today, consumption and income taxes have similar effects. Both discourage work effort.
Consider, however, another margin of adjustment: Work today in order to save and consume in the future. Let's continue with Daniel's example of a 50 percent tax rate. Suppose that the interest rate is 7 percent, so $1 saved today becomes $2 in 10 years.
With income tax: 1 hr work --> $16 pre-tax --> $8 post-tax --> $16 of savings in 10 years --->$4 more in income taxes on the interest--> $12 of chocolate cake, video games, and Red Sox tickets.
With consumption tax: 1 hr work --> $16 pre-tax --> $32 of savings in 10 years --> $16 of chocolate cake, video games, and Red Sox tickets + $16 of tax.
So under a consumption tax, there is a greater incentive to work and save today in order to consume in the future.
Let's be even more wonky about this and do a bit of math. Let W be the real wage, r be the interest rate, and t be the tax rate. Suppose I work today in order to save and consume in T years. Under an income tax, the amount of consumption I get for one hour of work is:
(1-t)W*[1+(1-t)r]^T
Under a consumption tax, the amount of consumption I get is:
(1-t)W*[1+r]^T
Now compare these after-tax relative prices to the before-tax relative price, which is
W*[1+r]^T
You can see that the consumption tax creates a constant wedge: the after-tax relative price is 1-t times the before-tax relative price, regardless of T. However, an income tax creates a growing wedge. The larger is T, the greater is the gap between the before-tax and after-tax relative price. In other words, a consumption tax taxes current and future consumption at the same rate, whereas an income tax in effect taxes future consumption at a higher rate than current consumption.
The bottom line: Both consumption taxes and income taxes discourage work, but income taxes discourage saving as well. |
