Joint Labour Supply of Married Couples: Efficiency and Distribution Effects of Tax and Labour Market Reforms

The paper presents a model of household labour supply that allows for simultaneous decisions of household members, complex and non-convex choice sets induced by tax and benefit rules, and quantity constraints on hours choice. The model is estimated using the 1993 Bank of Italy’s Survey of Household Income and Wealth, and used to simulate three hypothetical tax reforms: namely, a flat tax and two versions of a negative income tax system, under the constraint of equal tax revenue. All the reforms produce a larger household average disposable income, without worsening much the equality of the income distribution, and are supported by a majority of winners in the sample, although the proportion of winners varies considerably across income deciles. We also simulate the impact on labour supply and income of removing the quantity constraints on hours-wage packages available on the market, constraints that in Italy typically make full-time jobs more easily available than other jobs. The results show a considerable increase in participation among women belonging to relatively poor households, and a slight reductions in hours worked – given participation – across all households.