Tax and Benefit Reforms in a Model of Labour Market Transitions. ENEPRI Research Reports No. 25, 9 October 2006

This paper presents a method for taking advantage of labour market transitions to identify the effects of financial incentives on employment decisions. The framework used is very flexible and by imposing few theoretical assumptions it allows us to extend the modelled sample relative to structural models. The authors take advantage of this flexibility to include disabled persons in the model and to jointly analyse the behaviour of disabled and non-disabled persons. A great deal of attention is paid to the appropriate modelling of financial incentives in the labour market. In the case of disabled persons, taking account of financial incentives turns out to be an extremely complex process but one that in the end turns out to be well worth the effort. The model is used to compare reactions in the labour market to marginal changes in financial incentives and also to model one of the most important reforms of the UK Labour government – the introduction of the Working Families’ Tax Credit. The methodology relies on matching the transition and income data derived from cross-sectional and panel surveys, and could be used in other countries for which detailed, reliable income data are not collected in a panel format

A review of static and dynamic models of labour supply and labour market transitions

This paper aims to review the techniques and methods which have been developed by researchers to study labour supply and employment, unemployment and inactivity in the labour market. Progress in labour supply modelling in the last thirty years or so has been considerable. Firstly, the theory of labour supply has become much more sophisiticated; simple static-period models of the budget constraint and the hours decision have been augmented with new developments such as intertemporal optimisation, explicit treatment of the participation decision as distinct from the hours decision, and search theory. Secondly, the econometric techniques available to estimate these more advanced models on the data have expanded massively, along with increases in the amount and quality of data available and huge improvements in computing power. In this report we aim to provide a comprehensive survey of the state of the art in the field of labour supply estimation.

The role of employment experience in explaining the gender wage gap

The wage gap between male and female workers has narrowed in both the US and the UK over the past twenty five years. At the same time, employment rates for men and women have converged. This paper examines the relationship between these two facts by analysing the role played by labour market experience in explaining the narrowing gender wage gap. We analyse the relationships between male and female levels of experience and relative wages in the US and the UK over the period 1978 to 2000. The estimation procedure is based on pseudo panels created from cross-sectional data (Current Population Survey (CPS) for the US and Family Expenditure Survey (FES) for the UK). Possible biases from unobserved heterogeneity and the endogeneity of experience are addressed by using an ‘imputed’ measure of experience based on grouped data and by estimating the wage regressions in first differences. Differences in levels of experience are found to explain 39 percent of the gender wage gap in the US and 37 percent in the UK, and failure to control for unobserved heterogeneity is found to understate the role played by total experience in explaining the gap. The gender wage gap has diminished over recent successive cohorts of workers. However, the evidence suggests that the improvements in relative female wages can’t be attributed to changes in relative levels of experience. For each of the successive cohorts we examine, total experience increases the gender wage ratio by a constant 8 to 9 percentage points in the US and the UK. We find that the average experience for female workers relative to male workers has increased over successive cohorts. However, this has either been insufficient to lead to a noticeable effect on relative wages, or changes in the returns to experience have altered affecting female relative earnings unfavourably.gender wage gap, returns to experience, artificial panel data

Poorer Health – Shorter Hours? Health and Flexibility of Hours of Work

We analyse the role of health in determining the difference between desired and actual hours of work in a sample of German men using the Socio-Economic Panel Data for years 1996-2007. The effects of both self-assessed health and legal disability status are examined. About 60% of employees report working more than they would wish with the mean difference of -3.9 hours/week. We estimate static and dynamic model specifications allowing for auto-regressive nature of the dependent variable and testing for the role of lagged health status. Important differences are found between east and west German Länder. In the west we find statistically significant role of general health measures in determining the disequilibrium. Employees in bad health want to work on average by about 0.4 hour/week less according to the static specification, and by about 1 hour/week less if dynamics of health and of the disequilibrium are taken into account. This is respectively 10% and 25% of the mean difference. We find no effects of legal disability status on the disequilibrium which we interpret as a reflection of stronger legal position of disabled employees. In both east and west we find significant state dependence in the hours disequilibrium.hours worked, health, disability, labour market flexibility

'Klin'-ing up: effects of Polish tax reforms on those in and on those out

In 2007 and 2008 Polish governments introduced a series of reforms which led to a substantial reduction in the tax "wedge" (in Polish: "klin") on labour. The mean ATR on total labour cost was reduced from 41.6% to 34.0%. We show that when considered together the package of introduced reforms brought much greater reductions in the tax burden compared to a widely discussed 15% "flat tax". In the analysis we show the effects of the reforms both for the employed and for the non-employed populations. The latter analysis is done in such a way as to account for the entire (simulated) distribution of wages of the non-employed and shows interesting differences between the effects of reforms on employed and non-employed individuals. We argue that to fully appreciate the effect of reductions in labour taxation it is important to bear in mind that one of the reasons for introducing them is to make employment more likely for those who currently do not work. Given the extent of the reductions in the "klin" it is somewhat surprising that so far so little attention has been given to the recent Polish reforms.Work incentives, tax wedge, labour costs, employment

Apply with Caution: Introducing UK-Style In-work Support in Germany

Estimates of labour supply effects of recent UK reforms in the area of direct taxes and benefits show that policy can have significant influence on the level of employment. We confirm this in a simulation of in-work support system introduced into the German tax and benefit system. Our simulation results suggest that introducing in-work Tax Credits in Germany would increase employment of single individuals by over 100,000 but it would result in a reduction of labour supply among individuals living in couples by about 70,000. We find that Tax Credits would result in significant reductions of labour supply both among women and men in two earner couples. The result found for men is especially important as it is markedly different from all results found for the UK, where the overall response among men has always been found positive. Our estimation results call for a high degree of caution as far as "importing" UK-style Tax Credits to Germany is concerned. In-work support based on family income would reinforce the existing work disincentives for secondary earners through joint income taxations, reducing the employment levels of both men and women living in couples.Tax-benefit system, In-work benefits, Microsimulation, Household labour supply

Multi-Family Households in a Labour Supply Model: A Calibration Method with Application to Poland

The collective model of labour supply opened the household “black box” and allowed for individual treatment of partners in couples. However, the literature on labour supply has so far largely ignored a broader issue with special relevance to transition and developing countries – the distinction of single versus multi-family (“complex”) households. We propose a method to account for multi-family household structure by borrowing from recent applications of the collective model and combining estimation and calibration to identify the degree of resource sharing. We assume that each household is characterised by a between-family sharing parameter, which is calibrated on estimated preferences, the observed labour market status and other characteristics. The key identifying assumption is that preferences over income and leisure of specific family types living in single and multi-family households are the same conditional on observable characteristics. We apply the method to Polish labour market data.labour supply, within-household sharing, work incentives, transition

Mommies' Girls Get Dresses, Daddies' Boys Get Toys: Gender Preferences in Poland and their Implications

We examine the relationship of child gender with family and economic outcomes using a large dataset from the Polish Household Budgets' Survey (PHBS) for years 2003-2009. Apart from studying the effects of gender on family stability, fertility and mothers' labor market outcomes, we take advantage of the PHBS' detailed expenditure module to examine effects of gender on consumption patterns. We find that a first born daughter is significantly less likely to be living with her father compared to a first born son and that the probability of having the second child is negatively correlated with a first born daughter. Using the context of the collective model we provide interpretation of these results from the perspective of individual parental gender preferences. We also examine the potential effects of sample selection bias which may affect the results and may be important for other findings in the literature. Labor supply of mothers and overall child-related consumption is not affected by gender of the first child, but the pattern of expenditure significantly varies between those with first born sons and first born daughters. One possible interpretation of the findings is that Polish fathers have preferences for sons and Polish mothers have preferences for daughters. Expenditure patterns suggest potential early determination of gender roles – mommies' girls get dresses and daddies' boys get toys.gender preferences, fertility, child outcomes, family structure

'Klin'-ing Up: Effects of Polish Tax Reforms on Those In and on Those Out

In 2007 and 2008 Polish governments introduced a series of reforms which led to a substantial reduction in the tax "wedge" (in Polish: "klin") on labour. We show that when considered together the package of introduced reforms brought much greater reductions in the tax burden compared to a widely discussed 15% "flat tax". In the analysis we show the effects of the reforms both for the employed and for the non-employed populations. The latter analysis is done in such a way as to account for the entire (simulated) distribution of wages of the non-employed and shows interesting differences between the effects of reforms on employed and non-employed individuals. We argue that to fully appreciate the effect of reductions in labour taxation it is important to bear in mind that one of the reasons for introducing them is to make employment more likely for those who currently do not work. Given the extent of the reductions in the "klin" it is somewhat surprising that so far so little attention has been given to the recent Polish reforms.work incentives, tax wedge, labour costs, employment

Dynamics of Poor Health and Non-Employment

While there is little doubt that the probability of poor health increases with age, and that less healthy people face a more difficult situation on the labour market, the precise relationship between facing the risks of health deterioration and labour market instability is not well understood. Using twelve years of data from the German Socio-Economic Panel we study the nature of the relationship between poor health and non-employment on a sample of German men aged 30-59. We propose to model poor health and non-employment as interrelated risks determined within a dynamic structure conditional on a set of individual characteristics. Applying dynamic panel estimation we identify the mechanism through which poor health contributes to the probability of being jobless and vice versa. We find an important role of unobserved heterogeneity and evidence for correlation in the unobservable characteristics determining the two processes. The results also show strong persistence in the dynamics of poor health and non-employment.risk, non-employment, health, ageing, dynamic panel data