Making Work Pay: Increasing Labour Supply of Secondary Earners in Low Income Families with Children

Anna Kurowska,Michal Myck,Katharina Wrohlich

doi:10.2139/ssrn.2696369

Anna Kurowska, Michal Myck + Show 1 more

Open Access

https://doi.org/10.2139/ssrn.2696369

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Abstract

In-work support through the tax-benefit system has proved to be an effective way of increasing labour supply of lone mothers and first earners in couples in a number of OECD countries. At the same time these instruments usually create negative employment incentives for secondary earners. This in turn reduces the potential of in-work support to address the joint objectives of higher employment and lower poverty levels. In this paper we present a simulation exercise to examine labour supply implications of a diverse set of possible reforms to the main elements of tax and benefit support of families with children. We set the analysis in the context of the Polish tax and benefit system and show how an adequate combination of increased generosity of support with the introduction of a double earner premium may result in increased labour supply of first and second earners in couples. The simulated reactions are concentrated in the lower half of the income distribution thus increasing the potential of in-work support to alleviate poverty.

Highlights

Over the last few decades, in-work support has been introduced in many OECD countries with the objective to jointly address the goals of poverty reduction and increase in employment and it has been shown that these policies have positive effects on the labour supply of lone mothers and primary earners in couples
Such in-work financial support often goes along with strong negative work incentives for secondary earners. This is due to the fact that ‘classic’ in-work support such as the Earned Income Tax Credit (EITC) in the US or the Working Families’ Tax Credit (WFTC) in the UK are means-tested at family level
We have presented an exercise in simulating labour supply reactions of a diverse set of hypothetical reforms to the system of financial support for families with children which bring a number of general implications for designing tax-benefit systems

Summary

Discussion

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Introduction

Simulated reform scenarios: employment support through financial incentives

Findings

Modelling labour supply response to the simulated reforms

Conclusions