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

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  • Marco Caliendo
  • Ludovica Gambaro
  • Peter Haan

Abstract

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.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.55799.de/dp670.pdf
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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 670.

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Length: 15 p.
Date of creation: 2007
Date of revision:
Handle: RePEc:diw:diwwpp:dp670

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Keywords: Reservation/market wage ratio; income taxation; labour supply; microsimulation;

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  1. Eswar Prasad, 2003. "What Determines the Reservation Wages of Unemployed Workers? New Evidence From German Micro Data," IMF Working Papers 03/4, International Monetary Fund.
  2. Eckstein, Zvi & van den Berg, Gerard J., 2007. "Empirical labor search: A survey," Journal of Econometrics, Elsevier, Elsevier, vol. 136(2), pages 531-564, February.
  3. Arne Uhlendorff, 2006. "From No Pay to Low Pay and Back Again?: A Multi-State Model of Low Pay Dynamics," Discussion Papers of DIW Berlin 648, DIW Berlin, German Institute for Economic Research.
  4. Heckman, James J, 1974. "Shadow Prices, Market Wages, and Labor Supply," Econometrica, Econometric Society, Econometric Society, vol. 42(4), pages 679-94, July.
  5. Hogan, Vincent, 2004. "Wage aspirations and unemployment persistence," Journal of Monetary Economics, Elsevier, Elsevier, vol. 51(8), pages 1623-1643, November.
  6. Viktor Steiner & Katharina Wrohlich, 2004. "Household Taxation, Income Splitting and Labor Supply Incentives: A Microsimulation Study for Germany," Discussion Papers of DIW Berlin 421, DIW Berlin, German Institute for Economic Research.
  7. Eckstein, Zvi & Mortensen, Dale T., 2006. "Labor search," European Economic Review, Elsevier, Elsevier, vol. 50(4), pages 807-810, May.
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