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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

  • Caliendo, Marco

    ()
    (University of Potsdam)

  • Gambaro, Ludovica

    ()
    (London School of Economics)

  • Haan, Peter

    ()
    (DIW Berlin)

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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Bibliographic 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:
Publication status: published in: Applied Economics Letters, 2009, 16 (9), 877-883
Handle: RePEc:iza:izadps:dp2599

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Related research

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

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  1. Heckman, James J, 1974. "Shadow Prices, Market Wages, and Labor Supply," Econometrica, Econometric Society, vol. 42(4), pages 679-94, July.
  2. Uhlendorff, Arne, 2006. "From No Pay to Low Pay and Back Again? A Multi-State Model of Low Pay Dynamics," IZA Discussion Papers 2482, Institute for the Study of Labor (IZA).
  3. Hogan, Vincent, 2004. "Wage aspirations and unemployment persistence," Journal of Monetary Economics, Elsevier, vol. 51(8), pages 1623-1643, November.
  4. Eckstein, Zvi & van den Berg, Gerard J., 2007. "Empirical labor search: A survey," Journal of Econometrics, Elsevier, vol. 136(2), pages 531-564, February.
  5. Prasad, Eswar, 2003. "What Determines the Reservation Wages of Unemployed Workers? New Evidence from German Micro Data," IZA Discussion Papers 694, Institute for the Study of Labor (IZA).
  6. Eckstein, Zvi & Mortensen, Dale T., 2006. "Labor search," European Economic Review, Elsevier, vol. 50(4), pages 807-810, May.
  7. 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.
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