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

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  • Marco Caliendo
  • Ludovica Gambaro
  • Peter Haan

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.

Suggested Citation

  • Marco Caliendo & Ludovica Gambaro & Peter Haan, 2007. "The Impact of Income Taxation on the Ratio between Reservation and Market Wages and the Incentives for Labour Supply," Discussion Papers of DIW Berlin 670, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp670
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    References listed on IDEAS

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    1. Eckstein, Zvi & van den Berg, Gerard J., 2007. "Empirical labor search: A survey," Journal of Econometrics, Elsevier, vol. 136(2), pages 531-564, February.
    2. Viktor Steiner & Katharina Wrohlich, 2004. "Household Taxation, Income Splitting and Labor Supply Incentives – A Microsimulation Study for Germany," CESifo Economic Studies, CESifo Group, vol. 50(3), pages 541-568.
    3. Arne Uhlendorff, 2006. "From No Pay to Low Pay and Back Again?: A Multi-State Model of Low Pay Dynamics," Discussion Papers of DIW Berlin 648, DIW Berlin, German Institute for Economic Research.
    4. Hogan, Vincent, 2004. "Wage aspirations and unemployment persistence," Journal of Monetary Economics, Elsevier, vol. 51(8), pages 1623-1643, November.
    5. Mr. Eswar S Prasad, 2003. "What Determines the Reservation Wages of Unemployed Workers? New Evidence From German Micro Data," IMF Working Papers 2003/004, International Monetary Fund.
    6. Heckman, James J, 1974. "Shadow Prices, Market Wages, and Labor Supply," Econometrica, Econometric Society, vol. 42(4), pages 679-694, July.
    7. Christensen, Björn, 2001. "The Determinants of Reservation Wages in Germany Does a Motivation Gap Exist?," Kiel Working Papers 1024, Kiel Institute for the World Economy (IfW Kiel).
    8. Eckstein, Zvi & Mortensen, Dale T., 2006. "Labor search," European Economic Review, Elsevier, vol. 50(4), pages 807-810, May.
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    Cited by:

    1. Vaishali Zambre, 2018. "The Gender Gap in Wage Expectations: Do Young Women Trade off Higher Wages for Lower Wage Risk?," Discussion Papers of DIW Berlin 1742, DIW Berlin, German Institute for Economic Research.
    2. Ronny Freier & Viktor Steiner, 2010. "'Marginal employment' and the demand for heterogeneous labour - elasticity estimates from a multi-factor labour demand model for Germany," Applied Economics Letters, Taylor & Francis Journals, vol. 17(12), pages 1177-1182.

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    More about this item

    Keywords

    Reservation/market wage ratio; income taxation; labour supply; microsimulation;
    All these keywords.

    JEL classification:

    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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