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

Marco Francesconi (), Helmut Rainer () and Wilbert van der Klaauw ()

No 2980, IZA Discussion Papers from Institute of Labor Economics (IZA)

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 (search for similar items in EconPapers)
JEL-codes: C23 H31 I38 J12 J13 J22 (search for similar items in EconPapers)
Pages: 75 pages
Date: 2007-08
New Economics Papers: this item is included in nep-lab
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Published in: Economic Journal, 119 (535), 2009, F66 - F100

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Related works:
Journal Article: The Effects of In-Work Benefit Reform in Britain on Couples: Theory and Evidence (2009) Downloads
Working Paper: The effects of in-work benefit reform in Britain on couples: Theory and evidence (2009)
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