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

75 Pages Posted: 1 Sep 2007

See all articles by Marco Francesconi

Marco Francesconi

University of Essex; Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)

Helmut Rainer

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

Wilbert van der Klaauw

Federal Reserve Bank of New York; IZA

Date Written: August 2007

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.

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

JEL Classification: C23, H31, I38, J12, J13, J22

Suggested Citation

Francesconi, Marco and Rainer, Helmut and van der Klaauw, H. Wilbert, The Effects of In-Work Benefit Reform in Britain on Couples: Theory and Evidence (August 2007). IZA Discussion Paper No. 2980, Available at SSRN: https://ssrn.com/abstract=1011153 or http://dx.doi.org/10.2139/ssrn.1011153

Marco Francesconi (Contact Author)

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Helmut Rainer

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H. Wilbert Van der Klaauw

Federal Reserve Bank of New York ( email )

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