Family labour supply and taxes in Ireland

Abstract

Static structural models are considered, explaining labour supply of husband and wife in Irish families.It is assumed that the family chooses the optimal point in a finite set.Account is taken of nonlinearities and nonconvexities in the Irish system of income taxes and benefits, and of prediction errors in wages of nonworkers.Moreover, the neoclassical model is extended such that information on involuntary unemployment is incorporated in a structural way.Smooth simulated maximum likelihood is used to estimate the models, using ESRI household data drawn in 1987.Compared to most EC countries, labour supply of married females in Ireland is very low.The Irish tax system is characterized by "income splitting" so that the tax liability of the couple depends essentially on the joint income of husband and wife.A central question in the paper is the extent to which this tax system can explain the low participation rate of married women.We analyse the sensitivity of husbands' and wives' labour supply with respect to their own wage and that of their partner, and with respect to other income, and compare male and female labour supply under the actual and alternative tax regimes.

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