Income Taxes and Married Women's Labour Supply

Abstract

The paper reviews the literature on the effects of income taxes on married women's labour supply. Taxes introduce nonlinearities and nonconvexities in the budget set, creating many theoretical difficulties. Moreover, women's budget constraints have many particularities, which are often difficult to formalize. In order to deal with the endogeneity of the wage rate induced by taxes, the wage and hours functions are estimated jointly using an iterative estimation procedure, a method which relies on an explicit utility index. Labour supply theory predicts a negative effect of taxes on participation, but does not put any constraint upon the sign of the wage elasticity. Recent stimates do not give strong support to the labour supply theory. Empirical estimates lack robustness since they are subject to preferences, functional forms, simplifications on the data and on the budget set, and estimation techniques. Some recent theoretical developments are reviewed, and policy implications are discussed.