Differences in Hours Worked in the OECD: Institutions or Fiscal Policies?


  • We are grateful to an anonymous reviewer, Stijn Baert, Peter Claeys, Tine Dhont, Rafael Doménech, Gerdie Everaert, and Tara Sinclair for valuable suggestions and comments, and to Tine Dhont and Sarah Balliu for their contributions to the construction of the data set. We also benefited from comments received at the 24th Annual Congress of the European Economic Association (Barcelona, August 2009). We acknowledge support from the Flemish Government (Steunpunt Fiscaliteit en Begroting—Vlaanderen) and the Belgian Program on Interuniversity Poles of Attraction, initiated by the Belgian State, Federal Office for scientific, technical, and cultural affairs, contract UAP No. P 6/07. F. Heylen is grateful to De Windhorst for the hospitality experienced while working on this paper during the malleolus period. Any remaining errors are ours.


We study the determinants of the level and the evolution of per capita hours worked in a panel of OECD countries since the 1970s. Following Pesaran (2006), our empirical strategy allows for the possibility of cross-sectionally correlated error terms due to unobserved common factors, which are potentially nonstationary. We find that much of the variation in per capita hours worked across countries and over time can be explained by differences in the level and structure of taxes and government expenditures. Differences in (the evolution of) labor and product market institutions have much less of a role to play. Our results show that a careful treatment of the time-series properties of the data is crucial.