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The Impact of Income Taxation on the Ratio between Reservation and Market Wages and the Incentives for Labour Supply

Discussion Papers 670, 15 S.

Marco Caliendo, Ludovica Gambaro, Peter Haan

2007. Mar.

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Published in: Applied Economic Letters 16 (2008) Iss.9, 877-883


This paper extends previous research about the determinants of reservation wages by analysing the effect of progressive income taxation on the ratio between reservation and net market wages. Based on micro data for Germany (SOEP) we show that joint income taxation in Germany which discriminates by marital status, has a strong and highly significant impact on the reservation/market wage ratio. Relative to single filers, this leads to strong negative labour supply incentives for secondary earners and to positive incentives for first earners in married couples.

Peter Haan

Head of Department in the Public Economics Department

Topics: Taxes

JEL-Classification: J22;H24;H31
Keywords: Reservation/market wage ratio, income taxation, labour supply, microsimulation
Frei zugängliche Version: (econstor)