Low-Income Families, Maternal Labor Supply, and Welfare Reform

Viola Garstenauer and Nawid Siassi

No 01/2024, ECON WPS - Working Papers in Economic Theory and Policy from TU Wien, Institute of Statistics and Mathematical Methods in Economics, Economics Research Unit

Abstract: In this paper, we examine reforms that alleviate large employment disincentives induced by child-related transfers for married mothers. We develop a life-cycle model where married couples face labor market, child care and fertility risk, and make joint labor supply and consumption-saving decisions. The evolution of female human capital is endogenous and shaped by mothers’ employment decisions. We calibrate the model to the U.S. using data from the Current Population Survey. We show that participation tax rates exceed 25 percent for most mothers in our sample, and can be as high as 60 percent when including child care expenses. We then evaluate reforms to existing tax credits for working couples. We find that (i) expanding child care tax credits and (ii) introducing a secondary earner EITC deduction lead to substantially higher employment rates among married mothers. Both reforms are easily implementable, self-financing, and welfare-improving. A combination of both reforms closes the maternal employment gap altogether.

Keywords: Family labor supply; Child-related transfers; Income taxation (search for similar items in EconPapers)
JEL-codes: H24 H31 J12 J22 (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-dge, nep-lab and nep-pbe
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:tuweco:281162

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