Heterogeneity in Labour Supply Responses: Evidence from a Major Tax Reform

Abstract

We use a large and rich administrative household panel data set to estimate labour supply responses for a large number of subgroups in the Netherlands. The identification of the parameters benefits from a major tax reform in the data period. We uncover large differences in behavioural responses. In particular, we find differences in labour supply responses between households with and without children that are much bigger than suggested by previous studies that had to pool these household types in the estimation of preferences. An efficient tax-benefit system should take the substantial heterogeneity in behavioural responses into account.

Revealed social preferences of Dutch political parties

“…However, this is not the relevant case for The Netherlands. Empirical estimates of the labor-supply elasticity and the elasticity of taxable income in The Netherlands do not feature a U-shape with income (Jongen and Stoel, 2016;Mastrogiacomo et al, 2017). Therefore, we consider it unlikely that present bias plays an important role.…”

“…Hence, the average participation elasticity is targeted at 0.16. To ensure that the model-predicted elasticities decrease with income, we target the extensive-margin elasticities by income quartiles to be consistent with the evidence in Mastrogiacomo et al (2017).…”

“…In our model, f T n measures the elasticity of participation with respect to a change in the participation tax rate. Instead, Graafland et al (2001) and Mastrogiacomo et al (2017) report the elasticity of participation with respect to a change in the wage rate n, f n n ≡ dEn dn n En . To ensure the distributionk(v) is consistent with these empirical estimates we adopt this definition in our calibration.…”

“…28 Graafland et al (2001) do not report intensive-margin elasticities for different income groups. Using data for the period 1999-2005, Mastrogiacomo et al (2017) estimate intensive-margin elasticities for hours worked that are declining in income for singles and single parents, whereas intensive-margin elasticities for hours worked are rather constant for primary and secondary earners in couples. Jongen and Stoel (2016) estimate (intensive) taxable income elasticities using data for the period 1999-2005 for different income groups in The Netherlands.…”

“…Unfortunately, these data are not available. Instead, we use empirical evidence from Mastrogiacomo et al (2017) to target extensive-margin elasticities by income quartile, ensuring that the average extensivemargin elasticity equals 0.16 consistent with MIMIC. 40 Since there is a one-to-one mapping between income and ability in our model, we can employ this information to calibratek(v).…”