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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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Author Info
Marco Caliendo () (DIW Berlin, IAB Nuremberg and IZA)
Ludovica Gambaro () (London School of Economics)
Peter Haan () (DIW Berlin and Free University Berlin)

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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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Publisher Info
Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2599.

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Length: 17 pages
Date of creation: Feb 2007
Date of revision:
Handle: RePEc:iza:izadps:dp2599

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Related research
Keywords: reservation/ market wage ratio; income taxation; labour supply; microsimulation;

Other versions of this item:

Find related papers by JEL classification:
J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. 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. [Downloadable!]
  2. Heckman, James J, 1974. "Shadow Prices, Market Wages, and Labor Supply," Econometrica, Econometric Society, vol. 42(4), pages 679-94, July. [Downloadable!] (restricted)
  3. Hui, Weng-Tat, 1991. "Reservation Wage Analysis of Unemployed Youths in Australia," Applied Economics, Taylor and Francis Journals, vol. 23(8), pages 1341-50, August.
  4. Eckstein, Zvi & Mortensen, Dale T., 2006. "Labor search," European Economic Review, Elsevier, vol. 50(4), pages 807-810, May. [Downloadable!] (restricted)
  5. Eckstein, Zvi & van den Berg, Gerard J., 2003. "Empirical Labor Search: A Survey," IZA Discussion Papers 929, Institute for the Study of Labor (IZA). [Downloadable!]
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  6. 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. [Downloadable!]
    Other versions:
  7. Hogan, Vincent, 2004. "Wage aspirations and unemployment persistence," Journal of Monetary Economics, Elsevier, vol. 51(8), pages 1623-1643, November. [Downloadable!] (restricted)
    Other versions:
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