June 8, 2012

DIW Applied Micro Seminar

Women life-cycle labour suply: incentives and responses


June 8, 2012


DIW Berlin im Quartier 110
Room 5.2.010
Mohrenstraße 58
10117 Berlin


Monica Costa Dias, The Institute For Fiscal Studies, UK
We develop a life-cycle model of woman's labour supply, human capital formation and savings for welfare-to-work and tax policies' evaluation. Women's decisions are formalised in a dynamic and uncertain environment. The model includes a detailed characterisation of the tax system and of the dynamics of family formation while explicitly considering the determinants of employment and education decisions: (i) contemporaneous incentives to work, (ii) future consequences for employment through human capital accumulation, (iii) anticipatory effects on the value of employment and education (iv) insurance against income risk. Estimation of the model structural parameters is based on annual data from the British Household Panel Survey over the period 1991 to 2006. Many important features established in the empirical literature are reproduced in the simulation exercises, including the employment effects of the WFTC reform in the UK. We characterise the labour supply responses to changes in earned and unearned income and show how it can vary strongly over the course of life and across individuals. We then use the model to gain further insight into the responses to tax credit policies. We characterise responses at the margin, to small changes in parameters defining the tax credit profiles. We also look at a major reform in the UK, the October 1999 move from FC to WFTC, and characterise its impact and sensitivity to uncertainty.