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Short- and long-term participation tax rates and their impact on labor supply

Author

Listed:
  • Charlotte Bartels

    () (German Institute for Economic Research (DIW)
    Uppsala Center for Fiscal Studies (UCFS))

  • Nico Pestel

    () (Institute for the Study of Labor (IZA)
    University of Cologne
    Centre for European Economic Research (ZEW))

Abstract

Abstract Generous income support programs as provided by European welfare states have often been blamed to hamper employment. This paper investigates the importance of incentives inherent in the tax-benefit system for the individual decision to take up work. Using German microdata over the period 1993–2010, we find that recent reforms in Germany increased work incentives at the extensive margin measured by the participation tax rate (PTR), particularly for low-income individuals. Work incentives are even higher if the time horizon is extended to more than one year, pointing at an overestimation of the disincentives by standard measures. Regression analysis reveals that a decrease in the PTR increases the probability of taking up work significantly.

Suggested Citation

  • Charlotte Bartels & Nico Pestel, 2016. "Short- and long-term participation tax rates and their impact on labor supply," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(6), pages 1126-1159, December.
    • Handle: RePEc:kap:itaxpf:v:23:y:2016:i:6:d:10.1007_s10797-016-9400-9
    DOI: 10.1007/s10797-016-9400-9
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    References listed on IDEAS

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    Cited by:

    1. Diego Collado, 2018. "Financial work incentives and the long-term unemployed: the case of Belgium," Working Papers 1803, Herman Deleeck Centre for Social Policy, University of Antwerp.
    2. Bartels, Charlotte & Shupe, Cortnie, 2018. "Drivers of participation elasticities across Europe: gender or earner role within the household?," EUROMOD Working Papers EM7/18, EUROMOD at the Institute for Social and Economic Research.

    More about this item

    Keywords

    Labor force participation; Work incentives; Welfare; Unemployment insurance; Income taxation;

    JEL classification:

    • 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
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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