THE EFFECTS OF THE 1.03 MILLION YEN CEILING IN A DYNAMIC LABOR SUPPLY MODEL

Yukiko Abe

Contemporary Economic Policy, 2009, vol. 27, issue 2, 147-163

Abstract: In this paper I examine the effects of a means‐tested transfer system in Japan (“1.03 million yen ceiling”) in a dynamic labor supply model with endogenous retirement. In Japan, married women have reason to limit their annual earnings to no more than 1.03 million yen in order to receive a number of benefits available to low‐income wives, and in fact often choose to do so. In a dynamic model, the optimal labor supply schedule follows a pattern that is not seen in a static framework, which I call the “spillover effect.” The paper also examines the properties of dynamic welfare cost of this ceiling. (JEL J22, H24, H55)

Date: 2009
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