Rather discouragingly, Casey Mulligan is convinced that the labor market will do little more than keep up with population growth:

For better or for worse, many in our country want a more extensive safety net and more government regulation of business activities, as Western Europeans already have. Economists may argue about the short-run effects of a generous safety net, and whether it is desirable in the long run, but they agree that one way or another a generous safety net eventually reduces hours worked per person.
Even without expanding social programs, it seems that the Bush tax cuts may expire, and the federal government may otherwise raise taxes. With higher tax rates in the future, we have to expect hours worked per American to remain below what it was before the recession.

Part of what’s going on is that the size of the tax burden has, as you might expect, short-term and long-term effects. Over a short period of time, increases in marginal tax rates might have a negligible impact on hours worked per American. Over a longer period of time, however, we’re likely to see “changes in hours constraints” and as firms “tailor job offers to match workers’ aggregate tax preferences in equilibrium.” Those two phrases are drawn from a very interesting paper — “Adjustment Costs, Firm Responses, and Labor Supply Elasticities: Evidence from Danish Tax Records” — by economists Raj Chetty, John N. Friedman, Tore Olsen, and Luigi Pistaferri. My colleague Arpit Gupta led me to the paper, and it contains a number of valuable insights. The following is from the paper’s conclusion:

This paper has shown that the effects of tax policies on labor supply are shaped by adjustment costs and hours constraints endogenously chosen by firms. Because of these forces, modern micro-econometric methods of estimating elasticities focusing on policy changes that affect a subgroup of workers may substantially underestimate the structural elasticities that control steady-state behavioral responses.

As I understand it, the authors are recognizing that increasing returns to scale in leisure, etc., mean that hours constraints can’t change at the drop of a hat. No firm is an island and no subgroup of workers is an island. An increase in the tax burden might not make a huge difference for workers who are already socialized into working a certain number of hours, not least because discrete increases in marginal tax rates tend to be incremental. But a large cumulative increase in the tax burden will, over a period of years, definitely have an impact on the kind of jobs that are available, and the patterns that younger workers will embrace when it comes to vacations, etc.

So why does this matter? There is no question that the United States will face a much higher tax burden in the years to come, as Donald Marron of the Tax Policy Center explains:

Facing an aging population and rising health care costs, the federal government will continue to expand even if policymakers take serious steps to trim spending. That’s why policy wonks are working so hard to evaluate ways to raise more revenue. Cutting back on loopholes and other tax expenditures, taxing carbon emissions, introducing a value-added tax – all of these deserve attention in case America decides that it wants to finance a substantially larger federal government.
However, that focus sometimes overshadows a key fact about our tax system: Revenues are already on track to rise substantially in coming years. And not just because of an economic rebound and expiring tax cuts. There are structural reasons why tax revenues will grow faster than the economy.

Marron goes on to explain that this will hold true even if we see substantial tax cuts. This will have consequences for the U.S. labor market. High consumption taxes imposed at a flat rate can be compatible with robust growth, though, as Randall Holcombe has argued, the VAT might not work as well in the U.S. as it has elsewhere. Realistically, however, we’re far more likely to see a more steeply progressive tax code and, under PPACA, large increases in implicit marginal tax rates. I hope this isn’t a recipe for economic stagnation, but it looks like it.