Abstract
AbstractWe estimate how labor force participation among married women in Sweden responded to changing work incentives implied by a reform in the tax and transfer system in 1997. Using rich, population‐wide, administrative data, we estimate an average participation elasticity of 0.13, thereby adding to the scarce literature estimating participation elasticities using quasi‐experimental methods. We also highlight that estimated extensive margin responses necessarily are local to the observed equilibrium. Among low‐income earners, elasticities are twice as large in the group with the lowest employment level, compared with the group with the highest employment level.
Highlights
In recent decades there has been a large expansion of in-work tax credit programs
The consensus view in the literature is that these policies increased labor supply at the extensive margin for single mothers (Eissa and Liebman 1996, Meyer and Rosenbaum 2001) but at the same time discouraged work for a large number of secondary earners in couples (Eissa and Hoynes 2004, Francesconi et al 2009)
To assess the optimality of the tax system, a key issue is to understand the sensitivity of the secondary earners’ participation decision to work incentives. This can be achieved by quantifying the participation elasticity of secondary earners, i.e. the percentage change in secondary earner labor force participation in response to a percentage change in the financial reward of working
Summary
In recent decades there has been a large expansion of in-work tax credit programs. Examples are the Earned Income Tax Credit (EITC) in the United States and the Working Tax Credit (WTC) in the United Kingdom. The reason is that the tax credits are phased out as a function of family income rather than individual income This implies that if the primary earner’s income is sufficiently large, the family will experience a reduction in the tax credit if the secondary earner choses to work, thereby lowering the incentives for the secondary earner to enter the labor force.. To assess the optimality of the tax system, a key issue is to understand the sensitivity of the secondary earners’ participation decision to work incentives This can be achieved by quantifying the participation elasticity of secondary earners, i.e. the percentage change in secondary earner labor force participation in response to a percentage change in the financial reward of working. This elasticity determines the efficiency gains from reducing participation tax rates applying to secondary earners (Immervoll et al 2011)
Sign-in/Register to view highlights & summary 
Published Version (
Free)
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call