Social Multipliers and Labor Supply

In a recent discussion of Europe, my Harvard colleague Alberto Alesina writes:

Europeans are working less and less for three reasons: first, increasing marginal tax rates (especially from the 1960s to the 1980s); second, a preference for leisure and, third, labor regulation and union-imposed standards for work time, including retirement regulations. Social multipliers compounds these effects: if a family member or friend has more time off, your own benefit from leisure increases, creating more social demand for leisure.

This point about social multipliers is important. In my paper on Dynamic Scoring with Matthew Weinzierl, we noted (in footnote 6) that social multipliers can potentially reconcile the small labor supply elasticities estimated in the micro labor literature with the larger labor supply elasticities in some macro studies.

Supply siders should be the biggest fans of these social multipliers. If these multipliers raise the effective labor supply elasticity, as Alesina suggests, then tax cuts produce more economic growth than is estimated in conventional models, such as that used recently by the U.S. Treasury.