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

  • Francesconi, Marco

    ()

    (University of Essex)

  • Rainer, Helmut

    ()

    (Ifo Institute for Economic Research)

  • van der Klaauw, Wilbert

    ()

    (Federal Reserve Bank of New York)

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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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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  1. Pierre-André Chiappori & Richard Blundell & Costas Meghir, 2002. "Collective labour supply with children," IFS Working Papers W02/08, Institute for Fiscal Studies.
  2. Giulio Fella & Paola Manzini & Marco Mariotti, 2002. "Does Divorce Law Matter?," Working Papers 454, Queen Mary University of London, School of Economics and Finance.
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  6. Rainer, Helmut, 2007. "Should we write prenuptial contracts?," European Economic Review, Elsevier, vol. 51(2), pages 337-363, February.
  7. 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.
  8. 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.
  9. Richard Blundell & Pierre-André Chiappori & Thierry Magnac & Costas Meghir, 2001. "Collective Labor Supply : Heterogeneity and Nonparticipation," Working Papers 2001-32, Centre de Recherche en Economie et Statistique.
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  13. 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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  17. Ermisch, John & Pronzato, Chiara D., 2006. "Intra-Household Allocation of Resources: Inferences from Non-Resident Fathers’ Child Support Payments," IZA Discussion Papers 2498, Institute for the Study of Labor (IZA).
  18. Iyigun, Murat & Walsh, Randall P., 2007. "Endogenous gender power, household labor supply and the demographic transition," Journal of Development Economics, Elsevier, vol. 82(1), pages 138-155, January.
  19. Hilary Hoynes & Richard Blundell, 2001. "Has "In-Work" Benefit Reform Helped the Labour Market?," NBER Working Papers 8546, National Bureau of Economic Research, Inc.
  20. Heckman, James J, 1993. "What Has Been Learned about Labor Supply in the Past Twenty Years?," American Economic Review, American Economic Association, vol. 83(2), pages 116-21, May.
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  23. 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).
  24. Blundell, Richard, 2001. "Welfare Reform for Low Income Workers," Oxford Economic Papers, Oxford University Press, vol. 53(2), pages 189-214, April.
  25. Paul Gregg & Susan Harkness, 2003. "Welfare Reform and Lone Parents Employment in the UK," The Centre for Market and Public Organisation 03/072, Department of Economics, University of Bristol, UK.
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