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Title: To Work or Not to Work: Did Tax Reforms Affect Labor Force Participation of Secondary Earners?

Citation Type: Working Paper

Publication Year: 2005

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Abstract: During the last forty years of U.S. experience, the proportion of two earner couples in all married couples increased from 30% to 70%. During the same period, tax laws have undergone numerous changes, with major reforms taking place in the 1980s that effectively flattened the tax schedule. Did changes in tax laws make secondary earners more prone to work? We use a model of heterogeneous agents with discrete work choice in order to quantitatively assess the impact of income tax reforms on the observed patterns of married couples labor supply. Tax Simulator Software provided by NBER is used in conjunction with IRS Income Statistics to compute income and FICA taxes three times for each couple in the model: once when only the husband works, second when only the wife works, and third when both work. These calculations are used jointly with a model of family decision making to determine family labor supply for each prototypical couple in the data. Our main finding is that changes in tax laws account for 30% of the increase in the proportion of two earner couples in the 1980s but cannot account for the observed patterns in the other decades. Interestingly, we discover that the introduction of the Earned Income Tax Credit drives some of the observed changes in the pattern of wives hours by husbands income, in particular, the positive correlation of wives hours and husbands income for low levels of husbands income.

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Authors: Bar, Michael; Leukhina, Oksana

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Data Collections: IPUMS USA

Topics: Labor Force and Occupational Structure, Poverty and Welfare

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