A Century of Labor-Leisure Distortions

Abstract

I construct direct measures of labor-leisure distortions for the American economy during the period 1889-1996, using a new method for empirically evaluating competitive equilibrium models and extending that method to some noncompetitive situations. I then compare measured labor-leisure distortions to proxies for potential causes of those distortions: marginal tax rates, labor market regulation, and monopoly unionism.

Distortions have grown steadily over the century, with the exception of the Great Depression (when distortions were above trend), WWII (below trend), and the 1980's (below trend). Marginal tax rates are well correlated with labor-leisure distortions at low frequencies, but cannot explain Depression, wartime, or 1980's distortions. Monopoly unionism might explain some, but not all, of the Depression distortions, and the decline of unions might explain a substantial fraction of the reduced distortions in the 1980's.