Europeans need to work more

Income per person in the European region is around 30 percent less than in America and average growth rates are lower too. A new paper from the Organisation of Economic Co-operation and Development (OECD) examines why.

The OECD argues that America earns more than Europe, because more of its population works:

In America, 70 per cent of women work or are looking for work; in the European Union only 61 per cent are.

Only 45 per cent of those aged 55 to 64 years are looking for work or have a job in Europe, while the comparable figure is 62 per cent in America.

This rate sinks to 32 per cent in Italy and 29 per cent in Belgium.

Europe’s more onerous tax system explains some of this difference. The OECD contends that fewer women work in Europe because the incomes of a second earner are taxed at a much higher rate than the main earner. For example, in Germany, spouses of people on the average production worker’s wage must pay 53 cents in tax out of the first euro they earn.

Retirement rules and benefits also discourage older Europeans from working. Giving up guaranteed benefits for an uncertain job market is difficult. Moreover, some benefits expire if you keep working. The OECD argues that this constitutes an implicit “tax” on working during your potential retirement:

For 55-year-olds in Germany and France, this implicit tax amounts to 50 per cent of the average wage for people in that group.

For 60-year-old Dutch people, this loss of benefits is 90 per cent of the wage.

Belgians 60 or older face an effective tax rate of 80 per cent.

The OECD concludes that if pensions guaranteed only a lump sum of money – not a guaranteed yearly benefit – most Europeans would work as long as Americans.

Source: Jean-Philippe Cotis, Economic Policy Reforms: Going for Growth, Organisation of Economic Cooperation and Development, March 1, 2005.

For study: http://www.oecd.org/document/4/0,2340,en_2649_201185_34429380_1_1_1_1,00.html

For more on International Institutions and Growth: http://www.ncpa.org/pi/internat/intdex1.html

FMF Policy Bulletin/ 19 April 2005