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The Effects of In-Work Benefit Reform in Britain on Couples: Theory and Evidence

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Author Info

  • Francesconi, Marco

    ()
    (University of Essex)

  • Rainer, Helmut

    ()
    (Ifo Institute for Economic Research)

  • van der Klaauw, Wilbert

    ()
    (Federal Reserve Bank of New York)

Abstract

This paper examines the effects of the Working Families’ Tax Credit (WFTC) on couples in Britain. We develop a simple model of household decisions which explicitly accounts for the role played by the tax and benefit system. Its main implications are then tested using panel data from the British Household Panel Survey collected between 1991 and 2002. Overall, the financial incentives of the reform had negligible effects on a wide range of married mothers’ decisions, such as eligible (working at least 16 hours per week) and full-time employment (working at least 30 hours per week), employment transitions, childcare use, and divorce rates. Women’s responses, however, were highly heterogeneous, depending on their partners’ labour supply and earnings. Mothers married to low-income men showed larger responses in employment, especially if they had younger children. They were more likely to remain in the labour force and had higher rates at which they entered it. While more likely to receive the tax credit, they also experienced a greater risk of divorce. We find virtually no effect for women with higher-income husbands. Likewise, there are no statistically significant responses among married men.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2980.

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Length: 75 pages
Date of creation: Aug 2007
Date of revision:
Publication status: published in: Economic Journal, 119 (535), 2009, F66 - F100
Handle: RePEc:iza:izadps:dp2980

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Keywords: divorce; intrahousehold bargaining; household labour supply; tax credit;

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References

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  1. Jeffrey Grogger & Lynn A. Karoly, 2007. "The Effects of Work-Conditioned Transfers on Marriage and Child Well-Being: A Review," Working Papers 531, RAND Corporation Publications Department.
  2. Del Boca, Daniela & Flinn, Christopher J, 1995. "Rationalizing Child-Support Decisions," American Economic Review, American Economic Association, vol. 85(5), pages 1241-62, December.
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  6. Weiss, Yoram & Willis, Robert J, 1985. "Children as Collective Goods and Divorce Settlements," Journal of Labor Economics, University of Chicago Press, vol. 3(3), pages 268-92, July.
  7. Richard Blundell & Alan Duncan & Julian McCrae & Costas Meghir, 2000. "The labour market impact of the working families’ tax credit," Fiscal Studies, Institute for Fiscal Studies, vol. 21(1), pages 75-103, March.
  8. Rainer, Helmut, 2007. "Should we write prenuptial contracts?," European Economic Review, Elsevier, vol. 51(2), pages 337-363, February.
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  13. Imran Rasul, 2006. "The Economics of Child Custody," Economica, London School of Economics and Political Science, vol. 73(289), pages 1-25, 02.
  14. Mike Brewer & Marco Francesconi & Paul Gregg & Jeffrey Grogger, 2009. "Feature: In-work Benefit Reform in a Cross-National Perspective - Introduction," Economic Journal, Royal Economic Society, vol. 119(535), pages F1-F14, 02.
  15. Blundell, Richard, 2001. "Welfare Reform for Low Income Workers," Oxford Economic Papers, Oxford University Press, vol. 53(2), pages 189-214, April.
  16. Simon Clark, 2004. "Law, Property, and Marital Dissolution," ESE Discussion Papers 32, Edinburgh School of Economics, University of Edinburgh.
  17. Rainer, Helmut, 2007. "Should we write prenuptial contracts?," Munich Reprints in Economics 19819, University of Munich, Department of Economics.
  18. Richard Blundell & Hilary W. Hoynes, 2004. "Has 'In-Work' Benefit Reform Helped the Labor Market?," NBER Chapters, in: Seeking a Premier Economy: The Economic Effects of British Economic Reforms, 1980-2000, pages 411-460 National Bureau of Economic Research, Inc.
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  20. Giulio Fella & Paola Manzini & Marco Mariotti, 2002. "Does Divorce Law Matter?," Working Papers 454, Queen Mary, University of London, School of Economics and Finance.
  21. Marco Francesconi & Wilbert van der Klaauw, 2007. "The Socioeconomic Consequences of "In-Work" Benefit Reform for British Lone Mothers," Journal of Human Resources, University of Wisconsin Press, vol. 42(1).
  22. Marianne Bitler & Jonah Gelbach & Hilary Hoynes & Madeline Zavodny, 2004. "The impact of welfare reform on marriage and divorce," Demography, Springer, vol. 41(2), pages 213-236, May.
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Citations

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Cited by:
  1. Richard Blundell & Monica Costa Dias & Costas Meghir & Jonathan Shaw, 2013. "Female Labour Supply, Human Capital and Welfare Reform," Cowles Foundation Discussion Papers 1892, Cowles Foundation for Research in Economics, Yale University.
  2. Francesconi, Marco & Rainer, Helmut & van der Klaauw, Wilbert, 2008. "Unintended Consequences of Welfare Reform: The Case of Divorced Parents," IZA Discussion Papers 3891, Institute for the Study of Labor (IZA).
  3. Jeffrey Grogger & Lynn A. Karoly, 2007. "The Effects of Work-Conditioned Transfers on Marriage and Child Well-Being: A Review," Working Papers 531, RAND Corporation Publications Department.
  4. DAVID M. BLAU & WILBERT van der KLAAUW, 2013. "What Determines Family Structure?," Economic Inquiry, Western Economic Association International, vol. 51(1), pages 579-604, 01.
  5. Helmut Rainer & Stefan Bauernschuster & Natalia Danzer & Anita Fichtl & Timo Hener & Christian Holzner & Janina Reinkowski, 2013. "Kindergeld und Kinderfreibeträge in Deutschland: Evaluierung der Auswirkungen auf familienpolitische Ziele," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 66(09), pages 28-36, 04.
  6. Francesconi, Marco & Rainer, Helmut & Klaauw,, 2013. "Unintended consequences of welfare reform for children with single parents: a theoretical analysis," Munich Reprints in Economics 20333, University of Munich, Department of Economics.
  7. Ghazala Azmat, 2014. "Evaluating the effectiveness of in-work tax credits," Empirical Economics, Springer, vol. 46(2), pages 397-425, March.
  8. Blundell, Richard & Francesconi, Marco & van der Klaauw, Wilbert, 2011. "Anatomy of Welfare Reform Evaluation: Announcement and Implementation Effects," IZA Discussion Papers 6050, Institute for the Study of Labor (IZA).
  9. Monica Costa Dias & Jonathan Shaw & Costas Meghir & Richard Blundell, 2012. "The long-term effects of in-work benefits in a life-cycle model for policy evaluation," 2012 Meeting Papers 93, Society for Economic Dynamics.

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