The Impact of Income Taxation on the Ratio Between Reservation and Market Wages and the Incentives for Labour Supply

17 Pages Posted: 8 Mar 2007

See all articles by Marco Caliendo

Marco Caliendo

University of Potsdam; Institute for the Study of Labor (IZA)

Ludovica Gambaro

London School of Economics & Political Science (LSE)

Peter Haan

DIW Berlin, German Institute for Economic Research; IZA Institute of Labor Economics

Date Written: February 2007

Abstract

This paper extends previous research about the determinants of reservation wages by analysing the effect of progressive income taxation on the ratio between reservation and net market wages. Based on micro data for Germany (SOEP) we show that joint income taxation in Germany which discriminates by marital status, has a strong and highly significant impact on the reservation/market wage ratio. Relative to single filers, this leads to strong negative labour supply incentives for secondary earners and to positive incentives for first earners in married couples.

Keywords: reservation,market wage ratio, income taxation, labour supply, microsimulation

JEL Classification: J22, H24, H31

Suggested Citation

Caliendo, Marco and Gambaro, Ludovica and Haan, Peter, The Impact of Income Taxation on the Ratio Between Reservation and Market Wages and the Incentives for Labour Supply (February 2007). IZA Discussion Paper No. 2599, Available at SSRN: https://ssrn.com/abstract=968963

Marco Caliendo

University of Potsdam ( email )

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Institute for the Study of Labor (IZA) ( email )

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Ludovica Gambaro

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Peter Haan (Contact Author)

DIW Berlin, German Institute for Economic Research ( email )

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Berlin, 10117
Germany

IZA Institute of Labor Economics

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

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