No. 191 – Taxation and labor force participation: the case of Italy

Women's labor force participation is lowest in Italy among the OECD countries. Moreover, the participation rate of married women is positively correlated with their husbands' income. We show that high tax rates together with tax credits and transfers raise the burden for two-earner households, generating disincentives to work. We estimate a structural labor supply model for women and use the estimated parameters to simulate the effects of alternative revenue-neutral tax systems. We find that joint taxation implies a drop in the participation rate. Conversely, provisions for a working tax credit and gender-based taxation boost it; the effects of the former are concentrated among women with little schooling.