Enjoying Leisure

Arnold Kling continues the debate on happiness, leisure and taxes in the perspective of comparing Europe to the U.S. He does so in a post called European Productivity. I found this contribution to the discussion highly interesting, in this paper by Edward Prescott that Kling points to, my simple calculations and observations below is carried out in much greater detail. The qualitative implications are the same, tax-rates seem to determine our rational choice between consumption and leisure (and log-utility is the simplifying tool). However, when Kling is trying to spin the story against us Europeans using the following quote, he seemingly forgets about economy and embarks a vessel similar to that of the happiness research he so much likes to critize.

"Bartlett questions how much the Europeans are enjoying their leisure:

>>One reason for the short workday is that Europeans seem to get sick a lot more than Americans. According to a July 25 report in The New York Times: on an average day 25 percent of Norway's workers call in sick. A 2002 study in Sweden found that the average worker there took more than 30 sick days per year. Makes you wonder just how good their health care systems really are.">>

Instead of holding on to the economistic path so successfully entered here, an entirely different direction is pointed out! Before going into a discussion with Bartlett, let me continue the economic perspective:

We've converged upon log-utility and rational choice as the explanation for the observed variations in leisure given the differences in tax-rates. Why not use this utility function to measure how much utility the European welfare-state gains when it transfers wealth from high to low-income households!? Why not - because different households utilities are not comparable to each other? Well - with an argument borrowed from and similar to one put forth by DeLong, using individual weights on utilities to make them comparable should erase the utility increase from the welfare-state transfer system only if rich households utility were assigned larger weights than low-income households.

According to Edward Prescott's calculations:

"If France were to reduce its effective tax rate on labor income from 60 percent to the U.S. 40 percent rate, the welfare of the French people would increase by 19 percent in terms of lifetime consumption equivalents."

I would say that this decrease for the "stand-in" houshold used in the analysis is surprisingly small. With log-utility and some reasonable estimate of how the top 20 percent of French labour income tax is used to redistribute income, it is far from unlikely that the French actually gain welfare by keeping their high taxes, at least as calculated this way.

Update: Thanks to Ivan for pointing out this discussion, which also occurs here.