Female Labour Supply, Human Capital and Welfare Reform

Abstract

We estimate a dynamic model of employment, human capital accumulation - including education, and savings for women in the UK, exploiting tax and benefit reforms, and use it to analyze the effects of welfare policy. We find substantial elasticities for labor supply and particularly for lone mothers. Returns to experience, which are important in determining the longer-term effects of policy, increase with education, but experience mainly accumulates when in full-time employment. Tax credits are welfare improving in the UK and increase lone-mother labor supply, but the employment effects do not extend beyond the period of eligibility. Marginal increases in tax credits improve welfare more than equally costly increases in income support or tax cuts.