Consumption and Hours in the United States and Europe

: We document large differences between the United States and Europe in allocations of expenditures and time for both market and home activities. Using a life-cycle model with home production and endogenous retirement, we find that the cross-country differences in consumption tax, social security system, income tax, and total factor productivity (TFP) together can account for from 68 to 95 percent of the cross-country variations in aggregate hours and expenditures. These factors can also account well for the cross-country differences in allocations by age and generate substantially lower market hours in Europe for the age group of 60 and above as in the data. All the factors, except income tax, are quantitatively important for determining cross-country differences in expenditure allocations. Although the differences in social security system and income tax are crucial in explaining the difference in market hours around retirement ages, TFP and consumption tax are more important for the difference in market hours for prime ages.