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Greg Mankiw's Blog: Follow-up references

Greg Mankiw Citi

Date Posted:: September 27, 2021
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Higher tax rates significantly contribute to lower work effort in Western Europe compared to the US, according to economic analyses.

Economic analyses suggest that higher tax rates significantly contribute to lower work effort in Western Europe compared to the US. Studies indicate that tax rate differences among wealthy nations are a major factor in the disparity of market work time. For instance, a calibrated life-cycle model shows that divorce and tax mechanisms together account for 45% of the variation in labor supply between the US and Europe. Additionally, Hicksian and Frisch elasticities, which measure labor supply responsiveness, align with observed differences in aggregate hours across countries with varying tax systems. While unions and regulations also play roles, the evidence supports the view that taxes have a substantial impact on labor market behavior, particularly affecting women's labor force participation.

Greg Mankiw footnotes his recent NYT op-ed, "...economists disagree about the how far the tax-based explanation goes. A reasonable reading of the literature is that lower labor effort and incomes in Europe are likely due to a combination of higher tax rates, stronger unions, and greater regulations......we find that the divorce and tax mechanisms together can explain 45% of the variation in labor supply between the United States and the European countries."......Europeans today work much less than Americans because of the policies of the unions in the 1970s, 1980s, and part of the 1990s and because of labor market regulations. Marginal tax rates may have also played a role......Based on our reading of the micro evidence, we recommend calibrating macro models to match Hicksian elasticities of 0.3 on the intensive and 0.25 on the extensive margin and Frisch elasticities of 0.5 on the intensive and 0.25 on the extensive margin. Hence, it would be reasonable to calibrate representative agent macro models to match a Frisch elasticity of aggregate hours of 0.75. These elasticities are consistent with the observed differences in aggregate hours across countries with different tax systems..."

Follow-up references

In my most recent Times column, I did not have the space to fully explain the body of work that follows up on the Prescott hypothesis that higher tax rates explain lower work effort and national incomes in Western Europe. For interested readers (that is, the more nerdy ones), here are a some relevant references together with brief excerpts (emphasis added):

1. Steven Davis and Magnus Henrekson

"Lastly, let us return to the recent studies by Prescott (2002, 2003), which consider the output, employment and welfare consequences of personal taxes in an equilibrium model with one production sector and a simple labor-leisure choice for the representative household. Our evidence supports the view that tax rate differences among rich countries are a major reason for large international differences in market work time. At the same time, however, our evidence strongly suggests that labor and consumption taxes operate with powerful effect on several margins: substitution between legal and underground activity, substitution between home and market production, the mix of market production activity, and the composition of market expenditures."

2. Indraneel Chakraborty et al.

"Americans work more than Europeans. Using micro-data from the United States and 17 European countries, we document that women are typically the largest contributors to the cross-country differences in work hours. We also show that there is a negative relation between taxes and annual hours worked, driven by men, and a positive relation between divorce rates and annual hours worked, driven by women. In a calibrated life-cycle model with heterogeneous agents, marriage and divorce, we find that the divorce and tax mechanisms together can explain 45% of the variation in labor supply between the United States and the European countries."

3. Alberto Alesina et al.

"Our punch line is that Europeans today work much less than Americans because of the policies of the unions in the 1970s, 1980s, and part of the 1990s and because of labor market regulations. Marginal tax rates may have also played a role, especially for women's labor force participation, but our view is that in a hypothetical competitive labor market without unions and with limited regulation, these tax increases would not have affected hours worked as much. Certainly micro evidence on the elasticity of labor supply is inconsistent with a mainly tax-based explanation of this phenomenon, even though social multiplier effects may help in this respect."

4. Raj Chetty et. al.

"Based on our reading of the micro evidence, we recommend calibrating macro models to match Hicksian elasticities of 0.3 on the intensive and 0.25 on the extensive margin and Frisch elasticities of 0.5 on the intensive and 0.25 on the extensive margin. Hence, it would be reasonable to calibrate representative agent macro models to match a Frisch elasticity of aggregate hours of 0.75. These elasticities are consistent with the observed differences in aggregate hours across countries with different tax systems."

As I noted in my column, economists disagree about the how far the tax-based explanation goes. A reasonable reading of the literature is that lower labor effort and incomes in Europe are likely due to a combination of higher tax rates, stronger unions, and greater regulations.

Greg Mankiw, “Follow Up References,” Greg Mankiw’s Blog, September 22, 2021, http://gregmankiw.blogspot.com/2021/09/follow-up-references.html

Ed Comment: “Ben tell me what it means in practical/everyday terms? From my reading of the literature, nobody seems to have a clue about the long-term effects from higher taxes, notwithstanding the fact that they stupidly count buying healthcare from the government as taxes. What we care about is the gradual effects of people taking the risks necessary to slowly build the institutions that increase the returns to risk-taking. Again, it’s tax rate x the quality of ideas = payoff for risk-taking, which is the bottom line that matters. Without idea-generating institutions, Europe may have many fewer worthy ideas. Taxes don’t discourage investment in bad ideas, only good ideas. Tax effects should be greater in the US than Europe. Resulting growth is also a function of the number of talented people who get the proper training. Properly trained talent is the binding constraint. High payoffs gradually motivate people to undergo the arduous and tedious training necessary to produce things of valuable at the margin. (Water is valuable but not at the margin.) Most all the training is on the job. Working at BMW is not very valuable compared to working at Apple. What ate the elasticities that Mankiw cites measuring?”

Ben Comment: “You’re absolutely right about the long run effects of higher taxes on risk taking. We don’t have any good empirical estimate or evidence. In macro and public finance, economists usually look at the trade off between labor and leisure and think about leisure as “purchased” for the wage - the opportunity cost of that additional hour of labor. This is the elasticity that Mankiw is referring to. The cited Chetty paper discusses the Frisch elasticity of labor which is the elasticity of hours worked to the wage - the percent hours worked changes for a given percent change in the wage. An income tax would be modeled as a reduction in the wage rate, so the economist would use a tax change to estimate how much people’s hours worked also changed. In the PF literature, I believe this is called the elasticity of income with respect to taxes (I’m not 100% sure here because I never took PF). The Chetty paper cites a Frisch elasticity of.75 - a.75% reduction in wages leads to a 1% decrease in hours. The papers Mankiw cites all say part of the reason Euros work less than Americans is that they have higher taxes which makes leisure relatively cheaper than it is in America. Euros and Americans are picking their optimal consumption bundle (goods+services vs leisure) but because of differences in the relative prices of leisure, Euros substitute away from consumption towards leisure. All of this is to say - nothing Mankiw discusses or cites is thinking about taxes in terms of risk-taking or on the job training or anything else. Instead, they are focusing on the labor market effects of tax rises. The actual productivity increases you’re taking about are exogenous in almost all macro models. Romer has some endogenous growth models but, if I remember correctly, they almost never have labor in them at all, beyond the labor/leisure choice discussed by Mankiw.”

Ed Comment: “My take is that the elasticities Mankiw cites underestimate the true effects, escape in America. And I don’t care so much about the 80%. They aren’t really taxed anyway (payments over and above the government service they consume). I care about the 20% or less who pay all the taxes, produce most all of the TFP growth, and underwrite the risks. Segmentation, not averages. “

The Fairest Way to Reform Social Security May Also Be the Worst Way to Grow the Economy

Andrew Biggs American Enterprise Institute

Date Posted:: May 28, 2026
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Biggs argues that “fair” approaches to restoring Social Security solvency – those that do not cut already accrued benefits – are less effective than “unfair” ones that do, because the latter incentivize increased work effort, raising growth and revenue.

Imagine that Social Security reform follows the fairness model, in which accrued benefits are paid in full but the rate at which future benefits are earned is reduced. A simple way to do this is to increase the payroll tax rate To keep Social Security permanently solvent, meaning through 75 years and beyond, would require an immediate and permanent increase in the payroll tax rate [from] 12.4% to 17.6%. The higher rate would decrease labor supply and reduce economic growth. [Consider] an alternate reform, which looks clearly unfair: fix Social Security’s funding gap entirely by reducing accrued benefits that Americans already have earned. As of 2025, Americans had accrued $54 trillion in Social Security benefits. Social Security’s unfunded obligation as of 2025 was $26 trillion. So, roughly, this means cutting Americans’ “earned benefits” in half. [Analyzing the 1977 reform that undid the notorious 1972 “double-indexing” of benefits, a group of economists], using SSA earnings data, found that, for every dollar of lost benefits, the affected Americans increased their earnings by 61 cents. Moreover, these additional earnings would be taxed by Social Security, further strengthening the program’s finances. In effect, this makes cutting benefits a “cheaper” way to fix Social Security than raising taxes, because people respond in ways that also increase tax revenues.

Takeaways by Macro Roundup^® AI

A 5.2 pts payroll tax increase to 17.6% drives reduced labor supply and slower economic growth vs. the status quo.
$54 trillion in accrued Social Security benefits vs. the unfunded obligation reveals that benefit cuts would reduce growth drag but.

The World’s Most Surprising Capitalist Makeover Is Under Way in Sweden

Tom Fairless Wall Street Journal

Date Posted:: May 12, 2026
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Swedish public social spending is now 23.7% of GDP, just 1pp above that of the US and well under France’s 31.6%. Market-based reforms in the 1990s brought overall government spending down from 69.4% to 49.3% in 2024.

For decades, Sweden was shorthand for the brand of high-tax, high-spend government that managed people’s lives from cradle to grave through state-run hospitals, schools and care homes. No longer. With little fanfare, this Nordic country of 11 million has embraced capitalism. Today, nearly half of primary healthcare clinics are privately owned, many by private-equity firms. One in three public high schools is privately run, up from 20% in 2011. School operators are listed on the stock exchange. The capitalist makeover has allowed Sweden to do what few industrialized countries have managed in recent years: shrink the size of the state. That has enabled the government to sharply lower taxes and, economists say, sparked a surge in entrepreneurship and economic growth. Its total public social spending bill—which includes healthcare, education and all welfare payments—has fallen to 24% of gross domestic product, similar to the U.S. and well below the over 30% for nations like France and Italy. Sweden’s economy is expected to grow by around 2% a year through 2030, roughly the same pace as the U.S. and double the growth rates of France and Germany, according to an April forecast by the International Monetary Fund.

Takeaways by Macro Roundup^® AI

Sweden’s public social spending fell to 24% of GDP, matching the U.S. and 6+ pts below France/Italy, driving lower taxes.
Privately-run primary healthcare clinics reached nearly 50% of the market vs. 20% for high schools in 2011, demonstrating accelerating privatization.
Sweden’s projected 2% annual GDP growth through 2030 doubles France and Germany’s rates, resulting from state downsizing and capitalist sector.

How Policy and Demographics Are Reshaping SNAP: From Families with Children to Older Adults

Angela Rachidi American Enterprise Institute

Date Posted:: May 1, 2026
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About 40mm Americans, 12% of the population, receive SNAP benefits, up from 6% in 2000. In 2023, only 34% of these households included children, down from 49% in 2010, while 36% contained an elderly person, up from 16% in FY2010.

Comparing FY2000 with FY2025, the share of the population receiving SNAP doubled from 6% to 12%, while real SNAP costs per capita increased by 179%—from roughly $100 per year to $279 (in 2024 dollars). Despite this growth, per capita participation and costs in FY2025 remained below their pre-pandemic peak in 2013, which coincided with the aftermath of the Great Recession and changes in eligibility and other policies stemming from the 2008 Farm Bill. SNAP is countercyclical, meaning that all else equal, the number of people receiving SNAP should rise during recessions because of increased unemployment and decline as the economy recovers, [though] overall SNAP participation has grown faster than changes in the unemployment rate alone would predict. Over the long run, and especially since FY2020 (due to the Thrifty Food Plan’s increase in the maximum SNAP benefit), costs per capita have not returned to prerecession levels after a period of high unemployment. In FY2023, the share of SNAP households containing an elderly person (36%) exceeded the share containing a child (34%) for the first time. This was a sharp departure from the early 2000s, when more than half of SNAP households contained a child and less than 20% included an elderly person (Figure 2).

Takeaways by Macro Roundup^® AI

SNAP participation doubled from 6% to 12% of the population between FY2000–FY2025, driven by policy expansions and demographic shifts outpacing.
Real per capita SNAP costs rose 179% from $100 to $279 (2024 dollars) over 25 years, with the Thrifty Food.
FY2025 SNAP enrollment remains 8–12% below the FY2013 peak despite 25-year growth, indicating countercyclical policy design successfully targets recession-driven need.

Washington’s Growing Portfolio: Tracking U.S. Government Investments

Jonathan Hillman Council On Foreign Relations

Date Posted:: April 23, 2026
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Since January 2025, the USG has taken equity stakes totaling $20.9B in 16 American businesses. $8.6B, ~41% of the total, was invested in critical mineral miners and processors, while $8.9B, ~43% of the total, funded the government’s 10% stake in Intel.

Since January 2025, the U.S. government has invested $20.9 billion across sixteen deals involving direct ownership, broadening a toolkit that has traditionally focused on grants, loans, and tax incentives. The Department of Commerce has participated in six such deals, including taking a 10% stake in Intel. The Development Finance Corporation, the United States’ development bank, has executed three equity transactions in critical minerals, healthcare, and infrastructure. The Department of Defense leads the way with seven such deals. The U.S. government is also working with a range of partners and has mobilized an additional $4.75 billion in investment. Private co-investors include J.P. Morgan, Goldman Sachs, and others.

Takeaways by Macro Roundup^® AI

The U.S. government deployed $20.9bn in direct equity investments since January 2025, expanding beyond traditional grants and loans to drive.
The Department of Defense leads with seven equity deals of the sixteen total, establishing direct ownership as a core national.
Commerce Department’s 10% Intel stake exemplifies government equity participation in critical infrastructure, mobilizing private capital alongside public investment to strengthen.

How Federal Spending is Distributed by Age

Kent Smetters University of Pennsylvania

Date Posted:: April 2, 2026
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In 2025, of the 62.5% of Federal spending that is age-assignable on a per-capita basis, US retirees aged 65+ were given $43,700, working-age adults 26–64 got $7,300, and children and young adults got $4,300.

We trace spending items within 52 general spending categories, totalling $7T for the 2025 Fiscal Year. We are able to classify a total of $4.4T across three broad age categories and assign the remaining $2.6T to an all-ages residual. Retirees (adults age 65 and older) receive $2.7T, equal to 38.6% of total federal outlays and 61.9% of age-assignable spending. Working-age adults (ages 26-64) receive $1.2T (27.9% of age-assignable), and children and young adults (under age 26) receive $449B (10.3%). The dominance of the retiree category reflects two programs above all others: Social Security and Medicare. Social Security directs $1.3T to retirees, and Medicare sends $835B. Together, they account for 80% of all age-assignable spending on older adults. But the retiree total extends beyond these two entitlements. Federal employee retirement benefits ($169B), housing assistance for older households, Medicaid long-term-care spending, and VA medical care all contribute, making the federal budget more retiree-focused than a Social Security–only lens would suggest.

Takeaways by Macro Roundup^® AI

Federal spending heavily favors retirees, who receive 38.6 percent of total outlays through Social Security, Medicare, and related programs.
Working-age adults and children combined receive less than half the spending directed to retirees despite representing larger population segments.
Social Security and Medicare alone account for 80 percent of all federal spending on older Americans, dominating the retiree budget.

Has the United States Bent the Health Care Cost Curve?

David Cutler and Lev Klarnet Brookings Papers On Economic Activity

Date Posted:: March 30, 2026
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In 2024, medical spending as a share of GDP was just above its 2010 level and 15% ($977B) below its 2010 forecast; 21% of the gap was due to technology, 24% to price reductions, and 11–27% to reforms such as prior authorization and higher deductibles.

Five factors are important in the slowdown in spending [Figure 16]. The first is technology-associated changes in health and site of care. These correspond to the subsequent innovations in our model. Together, technologies along these lines account for 21% of the overall cost slowdown and double that in Medicare. Second, long-run supply is more elastic than short-run supply, which lowers spending over time. This is particularly apparent in the impact of patent expiration for pharmaceuticals and in relative declines in imaging reimbursement. We estimate that greater long-run supply explains 6% of the spending slowdown. Third, a variety of market changes contribute to reduced and more elastic demand, including increased cost sharing paid by consumers, physicians not paid as much for using technologies, and insurers imposing restrictions on technology use - a rough guess is that these account for 11 to 27% of the spending slowdown. Fourth, the population is healthier in ways that reduce spending. This includes fewer hospitalizations for smoking-related conditions and reduced need for formal home health care. The birth rate has fallen as well, which reduces the need for care. We estimate improved population health explains 7% of the spending slowdown. A major component is slower price growth. Net of upcoding, we estimate lower price growth explains 24% of the spending slowdown.

Higher tax rates significantly contribute to lower work effort in Western Europe compared to the US, according to economic analyses.

Biggs argues that “fair” approaches to restoring Social Security solvency – those that do not cut already accrued benefits – are less effective than “unfair” ones that do, because the latter incentivize increased work effort, raising growth and revenue.

Does preserving Social Security benefits require sacrificing economic growth?

Takeaways by Macro Roundup® AI

Related Articles:

Swedish public social spending is now 23.7% of GDP, just 1pp above that of the US and well under France’s 31.6%. Market-based reforms in the 1990s brought overall government spending down from 69.4% to 49.3% in 2024.

How is Sweden's shift to privatization impacting its economic growth?

Takeaways by Macro Roundup® AI

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About 40mm Americans, 12% of the population, receive SNAP benefits, up from 6% in 2000. In 2023, only 34% of these households included children, down from 49% in 2010, while 36% contained an elderly person, up from 16% in FY2010.

How Are Policy Changes and Demographic Shifts Impacting SNAP Enrollment?

Takeaways by Macro Roundup® AI

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Since January 2025, the USG has taken equity stakes totaling $20.9B in 16 American businesses. $8.6B, ~41% of the total, was invested in critical mineral miners and processors, while $8.9B, ~43% of the total, funded the government’s 10% stake in Intel.

Takeaways by Macro Roundup® AI

Related Articles:

In 2025, of the 62.5% of Federal spending that is age-assignable on a per-capita basis, US retirees aged 65+ were given $43,700, working-age adults 26–64 got $7,300, and children and young adults got $4,300.

Takeaways by Macro Roundup® AI

Related Articles:

In 2024, medical spending as a share of GDP was just above its 2010 level and 15% ($977B) below its 2010 forecast; 21% of the gap was due to technology, 24% to price reductions, and 11–27% to reforms such as prior authorization and higher deductibles.

Related Articles:

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