Effects of taxes and transfer payments on married women's labour supply and welfare

Abstract

It has been observed that the labour supply of married women is sensitive to wage rate and nonwage income as well as to other socio-economic variables. It is of interest, for economists and policy makers, to measure the effects of taxes and transfer payments on the labour supply and welfare of married women. In the last two decades, much effort has been devoted to the development of the theory of labour supply and to the application of this theory to policy analysis. This thesis intends to contribute to the study of labour supply on three counts. A usual way of estimating a system of labour supply and a demand functions is to estimate the labour supply function only, and parameters in the demand function are identified by the budget constraint and the labour supply function. We will discuss that a labour supply function estimated in this way is valid even if there exists a certain form of an unobservable transaction cost We also show that, under certain types of nonlinear budget constraints, the utility consistency of the labour supply function can be examined in a similar way to that of the labour supply function with linear budget constraints, and dual functions and identities still hold. Moreover, we develop a method of estimating utility consistent labour supply under an endogenous market wage rate. Individuals generally pay labour market entry costs such as the expenses of transportation, uniforms, child care, and self education. A part of these entry costs is paid for indirectly by the government through the deduction of these expenses from taxable income and through subsidies for child care. Our second contribution is to derive a numerical expression for the effects, on labour supply and earnings, of two types of subsidies for market entry, and to measure these effects using Australian data. The estimation result shows that if the government gave a lump sum subsidy to all working wives, a one dollar subsidy will increase an average wife's wage income by $1.10, and if the government gave a subsidy that was proportional to the number of hours worked, to all woridng wives, a one dollar subsidy would increase an average wife's wage income by $2.36. Our third contribution is to estimate a labour supply function with piecewiselinear budget constraints, and to assess several tax reforms. We shall focus especially on the difference between a tax system under which tax rates are based on individual income (individual-income-based tax system) and a tax system under which tax rates are based on a couple's joint income (joint-income-based tax system). We find that if both the pre-reform tax system and the post-reform tax system are based on individual income, introducing a single rate tax system will reduce the work effort of married women, and increase the excess burden of taxes. On the other hand, if both the pre-reform tax system and the post-reform tax system are joint-income-based, introducing a single rate tax system would encourage the work effort of married women, and reduce the excess burden of taxes. A lesson from this result is that similar tax reforms may have quite different effects on the labour supply and the welfare of married women according to whether the tax rate is based on individual income or on a couple's joint income.