Taxes and Time Allocation: Evidence from Single Women and Men

Abstract

Hundreds of papers have investigated how incentives and policies affect hours worked in the market. This paper examines how income taxes affect time allocation in the other two-thirds of the day. Using the Panel Study of Income Dynamics from 1975 to 2004, we analyze the response of single women's housework, labor supply, and other time to variation in tax and transfer schedules across income levels, number of children, states, and time. We find that when the economic reward to participating in the labor force increases, market work increases and housework decreases, with the decrease in housework accounting for approximately two-thirds of the increase in market work. Analysis of repeated cross-sections of time diary data from 1975 to 2004 shows that changes in "home production" account for at least half of the increase in market hours of work in response to policy changes. Data on expenditures from the Consumer Expenditure Survey from 1980 to 2003 show some evidence that expenditures on market goods likely to substitute for housework increase in response to a greater incentive to join the labor force. The baseline estimates imply that the elasticity of substitution between consumption of home and market goods is 2.43. The results are consistent with the classic time allocation model of Becker (1965).

Keywords: taxation, time allocation, labor supply, housework, home production, leisure

JEL Classification: H24, J22, E32