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Home Research areas Employment and pay Labour supply and the tax and benefit system

Labour supply and the tax and benefit system

Taxes and benefits that change the costs and returns from working can have large effects on labour supply choices. These responses have the potential to be one of the main sources of inefficiency of a distortionary tax system. The magnitude of the inefficiency depends on how labour supply reacts to the incentives to work and earn more.

In this area of research we study the determinants of employment, working hours and effort decisions, how sensitive these choices are to working incentives including those shaped by the tax and benefit system, how they depend on socio-demographic characteristics such as education, gender or family composition, and what they imply for the design of a tax and benefit system. Our empirical findings and expertise have directly informed the policy debate and design in this area. For example, the extensive work that culminated with the final report from the IFS Mirrlees Review has been instrumental in informing some of the design features of Universal Credit.

Selected highlights

Journal article | Econometrica
estimating_labour_supply_responses_using_tax_reforms
The 1980s tax reforms and the changing dispersion of wages offer one the best opportunities yet to estimate labour supply effects.
Journal article | The Review of Economic Studies
employment_hours_of_work_and_the_optimal_taxation_of_low_income_families
The analysis considers purely Pareto improving reforms and also optimal design under social welfare functions with different degrees of inequality aversion.
Past event
An IFS / UCL conference organised by Richard Blundell, Guy Laroque and Cormac O'Dea.
Journal article | American Economic Review
labor_supply_and_the_extensive_margin
In this paper we propose a systematic way of examining the importance of the extensive and the intensive margins of labor supply in order to explain the overall movements in total hours of work over time.
Journal article | Econometrica
female_labor_supply_human_capital_and_welfare_reform
We estimate a dynamic model of employment, human capital accumulation—including education, and savings for women in the United Kingdom, exploiting tax and benefit reforms, and use it to analyze the effects of welfare policy.
Book chapter
This chapter of the Mirrlees Review (Dimensions of Tax Design) provides an overview of the voluminous literature relating taxand the supply of effort that has developed since the Meade Report (Meade, 1978) on the UK tax system thirty years ago, with a focus on the empirical consensus on how taxes ...

Contacts

Contact IFS on 020 7291 4800 or mailbox@ifs.org.uk

Stuart Adam
Senior Research Economist
Monica Costa Dias
Deputy Research Director
David Phillips
Associate Director
Barra Roantree
Research Associate