This graph points to a pattern popularized by Edward Prescott. The standard argument of the left has been that Europeans work less than Americans because they enjoy leisure more. Prescott pointed out that a little more than a generation ago Europeans actually worked more than Americans! It is only in recent years that a work gap emerged. Did preferences change in such a short time?
It shows total hours worked in the economy divided by the working age adults (so hours worked by young teens and those 65 and above are assigned to the rest). Europe is weighted average of EU.15 minus 4 small nations for which OECD does not have complete data (Luxembourg, Portugal, Greece, Austria).
During the same period that this happened European countries expanded the welfare state and increased taxes, while the size of the government was relatively constant in the US (and marginal taxes decreased). Prescott thus argued that the two events were related, the fewer hours being caused by taxes. However he also pushed an estimate of the responsiveness of hours worked to taxes that most economists consider unrealistically high.
I personally think Prescott made it too hard on his model by only looking at direct taxes, and not including implicit taxes as part of social insurance and welfare programs. A Swede that is considering entering the labor market will not only have (say) 40% of his income taken by the state, he will also lose generous welfare programs. The implicit tax is often 80-90%, and sometimes over 100% (you actually make more on welfare than working).
The difference in effective taxes is thus higher between Europe and the US than Prescott's data suggests, and a more reasonable measure of responsiveness is enough to explain the differences. There are however no good data that include the total marginal tax each individual (or a representative group) faces, so it is impossible to do this calculation right.
Another argument is that countries with high taxes also have other characteristics that depress hours worked, such as strong unions that drive up wages and demand reduced hours rather than wage increases. However I believe that there is no convincing reason unions intrinsically would demand fewer hours worked rather than wage increase for their members. They do this in high tax countries because they are responding to the taxed: their members keep 100% of reduced hours the union negotiates, but might only keep half of the wage increases. Ultimately unions do what they believe will help their members.
Lastly some economists have pointed out that Europe was growing faster than the US in the immediate post war era by adopting American technology, and that once they stopped converging they also started working less. There is a chicken and egg problem here (if they had not stopped working they might have continued converging), but certainly this argument is remember to keep in mind as an alternative or at least complement to the policy explanation.
It is common for the left to assign most of the higher American per capita income to a "leisure gap" between Europe and the US. I show in a previous post that this is implausible, only a minor part of the difference in income can be explained (away) by leisure.
Here I want to make an additional point, that one third of the gap in work is due to lower employment rate in Europe. The welfare state taxes work, subsidizes not working and tends to push up wages so high that the unskilled cannot get jobs. Lots of free time for those shoved outside the labor market is a problem, not a sign of prosperity.
The source of this data is different than for my previous post about leisure, it is good to show you both types of data. The OECD data is based on calling thousands of people each month/quarter and asking them how much they worked. Time diaries have a smaller sample, but much more detailed information. The results are really very similar (which I hope is a sign of reliability).
Remember also that differences in market work are not the inverse of differences in leisure. Europeans work more in the household sector than American, which I show in the old post.
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