The Impact of Short- and Long-Term Participation Tax Rates on Labor Supply

47 Pages Posted: 4 Sep 2015

See all articles by Charlotte Bartels

Charlotte Bartels

German Institute for Economic Research (DIW Berlin) - German Socio Economic Panel

Nico Pestel

IZA Institute of Labor Economics

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Abstract

Generous income support programs as provided by European welfare states have often been blamed to hamper employment. This paper investigates the importance of incentives inherent in the tax-benefit system for the individual decision to take up work. Using German microdata over the period 1993-2010 we find that recent reforms in Germany increased work incentives at the extensive margin measured by the Participation Tax Rate (PTR), particularly for low-income individuals. Work incentives are even higher if the time horizon is extended to more than one year, pointing at an overestimation of the disincentives by standard measures. Regression analysis reveals that a decrease in the PTR increases the likelihood of taking up work significantly.

Keywords: labor force participation, work incentives, welfare, unemployment insurance, income taxation

JEL Classification: H24, H31, J22, J65

Suggested Citation

Bartels, Charlotte and Pestel, Nico, The Impact of Short- and Long-Term Participation Tax Rates on Labor Supply. IZA Discussion Paper No. 9151. Available at SSRN: https://ssrn.com/abstract=2655100

Charlotte Bartels (Contact Author)

German Institute for Economic Research (DIW Berlin) - German Socio Economic Panel ( email )

DIW Berlin
Berlin, Berlin 14191
Germany

Nico Pestel

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

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