A Cross-Country Comparison of the Impact of Labor Income Tax on Female Labor Supply

Macroeconomists have long been interested in understanding differences in hours worked across countries. Prescott (2004) shows that differences in labor income tax explain the majority of the difference in hours worked between the United States and European countries. In this paper we go one step further in quantifying the impact of labor income tax on differences in hours worked between the United States and European countries. First, we decompose hours worked by gender and marital status, and we find that females are responsible for more than half of the difference in hours worked. Within females, we find that married females are responsible for more than half of the difference in hours worked. Second, given these findings, we quantify the impact of differences in labor income tax in explaining differences in aggregate hours worked. The main contribution of this paper is that we do not restrict the analysis of differences in labor income tax to differences in the progressivity of the tax schedule but we also incorporate differences in the treatment of secondary earners across countries. As a result, we find that differences in labor income tax explain two thirds of the difference in aggregate hours worked across countries, and we also find that differences in the treatment of secondary earner explain two thirds of the difference in hours worked between married and single females.