Heterogeneity in Labour Supply Responses: Evidence From A Major Tax Reform

OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 0305–9049
doi: 10.1111/obes.12168
Heterogeneity in Labour Supply Responses: Evidence

from a Major Tax Reform*
Mauro Mastrogiacomo,†,‡ Nicole M. Bosch,§ Miriam D. A. C.
Gielen,¶ and Egbert L. W. Jongen**
†VU University Amsterdam, De Nederlandsche Bank and Netspar, De Boelelaan 1105,

1081HV, Amsterdam, The Netherlands
‡VU University Amsterdam, Faculty of Economics and Business Administration, De
Boelelaan 1105, 1081 HV Amsterdam, The Netherlands (e-mail: m.mastrogiacomo@vu.nl)
§CPB Netherlands Bureau for Economic Policy Analysis, Bezuidenhoutseweg 30, 2594 AV
The Hague, The Netherlands (e-mail: n.m.bosch@cpb.nl)
¶Ministry of Social Affairs and Employment, Parnassusplein 5, 2511 VX The Hague, The
Netherlands (e-mail: mgielen@minszw.nl)
**CPB Netherlands Bureau for Economic Policy Analysis and Leiden University, CPB
Netherlands Bureau for Economic Policy Analysis, Bezuidenhoutseweg 30, 2594 AV The
Hague, The Netherlands (e-mail: e.l.w.jongen@cpb.nl.)
Abstract
We use a large and rich administrative household panel data set to estimate labour supply
responses for a large number of subgroups in the Netherlands. The identification of the
parameters benefits from a major tax reform in the data period. We uncover large differences
in behavioural responses. In particular, we find differences in labour supply responses
between households with and without children that are much bigger than suggested by
previous studies that had to pool these household types in the estimation of preferences.
An efficient tax-benefit system should take the substantial heterogeneity in behavioural
responses into account.
I. Introduction
In the wake of the Great Recession, and faced with an ageing population, policy makers
are reconsidering their tax-benefit policies and the trade-off between equity and efficiency.
The response of labour supply to changes in financial incentives, traditionally measured
by the wage elasticity of labour supply, plays a key role in the efficiency losses from
JEL Classification numbers: C25, C52, H31, J22

*The authors thank the editor Jonathan Temple and three anonymous referees for very helpful comments and
suggestions. Furthermore, we have benefitted from comments and suggestions by Hans Bloemen, Richard Blundell,
Henk-Wim de Boer, Chris van Klaveren, Arthur van Soest, Isolde Woittiez, participants of the IZA Labour Supply
Workshop October 2011 in Bonn and participants of the EALE Conference September 2012 in Bonn. Remaining
errors are our own.
1
© 2017 The Department of Economics, University of Oxford and John Wiley & Sons Ltd.
2 Bulletin
redistribution via the tax-benefit system.1 Furthermore, as policy makers target taxes and
benefits at different groups in the labour market, they also require detailed knowledge of
labour supply responses for different subgroups (e.g. singles vs. couples, households with
vs. without children, high vs. low skilled), and different decision margins (e.g. participation
in persons vs. hours worked per employee), to optimize the tax-benefit system for given
political preferences for redistribution.
In this paper, we use a large and rich household panel data set to estimate the labour
supply responses for a large number of subgroups within the labour market in the Nether-
lands. The size of the data set allows us to estimate preferences separately for subgroups
that had to be pooled in earlier studies. Furthermore, a major tax reform in our data period
benefits the identification of the structural parameters.2
We estimate the labour supply responses for a large number of subgroups within the
Dutch labour market using the Labour Market Panel (Arbeidsmarktpanel in Dutch) of
Statistics Netherlands (2009). The Labour Market Panel is an administrative household
panel data set covering the years 1999–2005. The 2001 tax reform in the Netherlands
caused major exogenous variation in budget constraints. We use a discrete choice model to
estimate preferences over income and leisure and the corresponding labour supply elastici-
ties. To determine household budget constraints we use the advanced tax-benefit calculator
MIMOSI (Romijn et al., 2008).3
Our main findings are as follows. First, there are large differences in the labour supply
elasticity across different demographic groups and decision margins. We find that the labour
supply elasticity of men and women is quite similar when they are single. But in couples,
men have much smaller elasticities than women. Furthermore, cross-elasticities of men’s
wages on women’s labour supply in couples with children are non-negligible. We find the
highest labour supply elasticities for single parents, in particular for single parents with
preschool age children. For all household types we find that low-skilled individuals have
much higher labour supply elasticities than their high-skilled counterparts, and that the
participation response is much larger than the hours-per-week response. We also find that
immigrants have a higher labour supply elasticity than natives.
Second, differences in the labour supply elasticity between households with and with-
out children are much larger than previously thought. Earlier studies had to pool these
household types when estimating preferences, due to the small number of observations,
and they find small differences in labour supply elasticities between households with and
without children. Indeed, in their overview paper, relying on estimates where they pool
households with and without children, Bargain, Orsini and Peichl (2014) conclude for
women in couples that ‘... elasticities are only slightly larger for women with children’
(Bargain et al., 2014, p. 738). Furthermore, for single women they conclude that ‘[S]ingle
1
A related strand of literature studies the elasticity of taxable income (ETI) to measure the distortions of taxation,
see e.g. the overview in Saez, Slemrod and Giertz (2012). The ETI also captures other responses to changes in tax
rates, like changes in effort and tax evasion. However, there is an active academic debate over whether the ETI is
a sufficient statistic to measure the distortions from taxation, see e.g. Chetty (2009), Piketty, Saez and Stantcheva
(2014) and Doerrenberg, Peichl and Siegloch (2017).
2
Chetty (2012) shows that large changes in budget constraints allow for more precise estimates of structural
parameters, by reducing the role of frictions in behavioural responses.
3
MIMOSI is the official tax-benefit calculator of the Dutch government, developed and maintained at CPB Nether-
lands Bureau for Economic Policy Analysis.
© 2017 The Department of Economics, University of Oxford and John Wiley & Sons Ltd
Heterogeneity in Labour Supply Responses 3
mothers tend to have larger elasticities than childless women yet differences are usually
not significant ... ’ (Bargain et al., 2014, p. 740). We do not pool these households in the
estimation of preferences, and find that labour supply elasticities of households with chil-
dren are almost twice as large as labour supply elasticities of households without children
(and the difference is statistically significant). This is true both for single parents relative
to singles without children, and for men and women in couples with children relative to
men and women in couples without children.
Third, given the substantial heterogeneity in behavioural responses, an efficient tax-
benefit system is inherently a complex tax-benefit system. The results suggest that targeted
policies such as tax credits and subsidies, for example the ‘working poor’, secondary earners
(in particular secondary earners with young children) and working single parents, are
relatively effective in raising labour participation, whereas an across-the-board reduction
in marginal tax rates is not. The results also suggest that the distortions resulting from
welfare benefits for singles without children and single parents, and from income support
for single-earner couples, are relatively high. Hence, targeted income support for the non-
employed requires a careful balancing of equity and efficiency.
We build on a large body of literature using structural discrete choice models to study
labour supply responses to changes in financial incentives (e.g. Van Soest, 1995; Keane and
Moffitt, 1998; Aaberge, Colombino and Strom, 1999; Brewer et al., 2006; Bargain et al.,
2014). However, we offer two major improvements over the existing literature. First, the size
of our data set allows us to estimate preferences separately for subgroups that had to be pooled
in earlier studies.4 Not pooling the data, we find much larger differences in behavioural re-
sponses, in particular between households with and without children. Second, previous stud-
ies had to rely on a single cross-section or on repeated cross-sections from a period when
there was hardly any change in the tax system. Hence, the identification comes only from
cross-sectional differences in financial incentives due to nonlinearities in the tax-benefit sys-
tem. We use 7 years of data, with a major tax reform in the middle. This strengthens our
identification by generating major exogenous variation in the budget constraints of house-
holds over time. Indeed, with these improvements our approach satisfies all the requirements
set out by Meghir and Phillips (2010) p. 227): ‘[E]stimating incentive effects in a convincing
way thus requires us to find solutions to all these problems at the same time. This calls for a
sufficiently flexible approach, that allows for fixed costs of work, does not impose theory a
priori everywhere in the sample (thus in a sense increasing model flexibility), uses exogenous
changes to work incentives to identify their effect, and allows for taxes and benefits. This is
of course a large set of requirements, but all have been shown to be important empirically’.
Furthermore, in contrast to most of the existing literature, we compare the predictions of our
structural model with the findings of two quasi-experimental studies of tax reforms using the
same data set (Bosch and Jongen, 2013; Bettendorf, Folmer and Jongen, 2014).5
The outline of the paper is as follows. In section II, we outline the structural model
and the empirical methodology. In section III, we discuss the data set and the changes in
4
A limitation of the analysis is that we do not consider the labour supply elasticity of teenagers and workers close
to retirement, two subgroups that have been shown to be rather responsive to financial incentives (Blundell, Bozio
and Laroque, 2011). For both groups, a dynamic model, including the schooling and retirement choice, seems more
appropriate (Keane, 2011). This is left for future research.
5
Validating a structural model with experimental methods was pioneered by Todd and Wolpin (2006).
4 Bulletin
financial incentives caused by the 2001 tax reform. Section IV gives the empirical results
for preferences and the corresponding labour supply elasticities. Section V compares these
results with the findings of related studies. In section VI we then discuss a number of
key policy implications of our findings and section VII concludes. An Online Appendix
contains supplementary material.
II. Structural model

Our baseline specification for preferences is the flexible translog function (e.g. Van Soest,
1995).6 Below we outline the specification for couples; the specification for singles is
similar but without the partner variables.
The choice of working hours by each partner is a coordinated decision between the
two adult household members m (male) and f (female).7 The partners maximize house-
hold utility by choosing the utility-maximizing combination of working hours {hm , hf }.8
Household utility depends on the log of household disposable income9 log y, the log of
leisure of the male log lm and the female log lf (where l = 1 − h/L, with L denoting total
time available per individual), fixed costs of work10 for the male fcm and the female fcf ,
and an idiosyncratic component "hm hf (whose structure is discussed below):
U (y, hm , hf ; X, ") = y log y + lm (X) log lm + lf (X) log lf + yy (log y)2 + lm lm (log lm )2
+ lf lf (log lf )2 + ylm log y log lm + ylf log y log lf + lm lf log lm log lf
+ 1(hm > 0)fcm (X) + 1(hf > 0)fcf (X) + "hm hf , (1)
where 1(.) is the indicator function, and we allow the linear terms in leisure and the fixed
costs to depend on observable individual and household characteristics X:11
lm (X) = Xlm lm ,
lf (X) = Xlf lf ,
fcm (X) = Xfc m fcm ,
fcf (X) = Xfc f fcf .
6
Results for other functional forms often used in empirical labour supply studies are given in the Online Appendix
and discussed in section IV.
7
In the estimations we drop same sex households.
8
Samuelson (1956) shows that in a unitary model individual utilities can be aggregated to obtain a household
utility function.
9
We abstract from a savings decision, and use disposable household income for consumption.
10
As shown by, for example, Van Soest (1995) fixed costs are necessary to reproduce the low share of individuals
that work only a few hours per week. Since we do not have data on fixed costs of work, we remain agnostic about
them and simply include dummies in the utility function.
11
We also estimated specifications where we allowed for random preference heterogeneity in the linear income
term:
y () = y + y .
However, the estimated variance of "y was either small and we could not reject it was zero (singles without children,
couples with children, couples without children) or it was small, we did reject it was zero but it hardly affected the
resulting labour supply elasticities (single parents) (details available on request). In the analysis we therefore focus
on the specifications without random preference heterogeneity.
The translog specification for preferences resulted in a large share of single parents hav-
ing negative marginal utility of income in the observed choices (see the Online Appendix).
A negative marginal utility of income is not necessarily a problem in the random utility
framework. We can always rationalize a given choice with a favourable draw of the random
utility component for the chosen option. However, the interpretation of the structural model
and policy analysis becomes problematic when a large share of the observed choices has
negative marginal utility of income.12 Therefore, for single parents we use the following
Box–Cox specification for preferences that forces marginal utility of income (and leisure)
to be positive:13
y l
y −1 l −1
U (y, h; X, ") = exp(y ) + exp(l (X))
y l
y l

(y − 1)(l − 1)
+ exp(yl ) + 1(h > 0)fc (X) + "h . (2)
y l
Household disposable income is a function of working hours of the male and the female,
their respective gross hourly wages wm and wf , and the tax system T which depends on
individual and household characteristics, according to:
y(wm hm , wf hf , T ) = wm hm + wf hf − T (wm , hm , wf , hf ; X), (3)
where we assume that gross hourly wages do not vary with hours worked. For the em-
ployed, we use observed gross hourly wages. For the non-employed, we impute gross
hourly wages from an estimated wage equation (see the Online Appendix). We take 60
draws from the estimated wage distribution for each non-employed person, and use sim-
ulated maximum likelihood to account for the wage prediction error (Löffler, Peichl and
Siegloch, 2014b).14 , 15
In the estimation of preferences we use a discrete choice model (as in e.g. Van Soest,
1995; Keane and Moffitt, 1998; Aaberge et al., 1999; Brewer et al., 2006; Bargain et al.,
2014). Discrete choice models have become popular in labour supply analysis because they
can take into account all the complexities in the budget set resulting from the tax-benefit
system (such as kinks and non-convexities). Furthermore, the discrete choice approach
does not require ex ante imposition of quasi-concavity of preferences; this can be checked
12
Some researchers therefore impose a positive marginal utility of income directly, for example Blundell and
Shephard (2012) via their choice of functional form and Bargain et al. (2014) via a constraint in the likelihood
maximization (which guarantees that at least 95% of the observations have positive marginal utility with the set of
estimated parameters).
13
This is the specification used in Blundell and Shephard (2012), extended with the interaction term between
income and leisure used in Dagsvik and Strom (2006). Using the Box–Cox specification of Dagsvik and Strom
(2006) with a linear coefficient instead of the exponent of the coefficient again resulted in a large share of single
parents having negative marginal utility of income in the observed choices (details available on request).
14
For the random draws we use Halton sequences which give even coverage over the domain of the sampling
distribution and generate negative correlation over observations which reduces the variance of the simulated function
(Train, 2003; Cameron and Trivedi, 2005).
15
In the Online Appendix we also present results using simulated wages for both the employed and the non-
employed, and discuss these results in section IV.
6 Bulletin
ex post.16 Individuals can choose working hours from a discrete set H = {h0 ,…, hZ }, which
is the same for all individuals. We experimented with a number of discretizations; an interval
of 8 hours (a normal working day in the Netherlands) running from 0 to 40 hours/week
gave a good fit of the data and worked well in the estimations.17 For singles we then have
six discrete labour supply options and for couples we have 6 · 6 = 36 discrete labour supply
options.
To reproduce heterogeneous choices for otherwise similar households, each labour
supply option has a unique idiosyncratic term ε that captures unobserved household option-
specific utility components. ε is assumed to follow a Type-I extreme value distribution,
resulting in the convenient multinomial logit specification for the predicted frequencies
of the labour supply choices (McFadden, 1978; Creedy and Kalb, 2005). The likelihood
function is given in the Online Appendix. We should note that we only use the panel
dimension of the data in the estimation of the wage equations; accounting for the panel
dimension in preferences (e.g. Haan, 2010) is left for future research. However, note that by
using 7 years of observations with a major tax reform in the middle, the identification of the
parameters still benefits from major exogenous variation in budget constraints over time.
In section IV, we present the estimated preferences. However, in discrete choice mod-
els there is no closed-form solution for labour supply elasticities. Therefore, we simulate
the implicit labour supply elasticities, using an increase in gross hourly wages of 10%.
We report the elasticity of total hours worked, the extensive-margin elasticity and the
intensive-margin elasticity. We calculate the elasticity of total hours worked by compar-
ing the predicted average hours worked for each individual, and then averaged over all
individuals, in the base and after we increase their gross hourly wages. We calculate the
extensive or participation elasticity by comparing the predicted probability of working for
each individual, and then averaged over all individuals, in the base and after we increase
their gross hourly wages. We calculate the intensive or hours-per-employed elasticity by
comparing the predicted average hours worked averaged over the labour supply options
with positive working hours, and then averaged over all individuals, in the base and after
we increase their gross hourly wages.
III. Data set and tax reform

We use data from a large administrative panel data set on Dutch households for the period
1999–2005, the Labour Market Panel (Arbeidsmarktpanel in Dutch) of Statistics Nether-
lands (2009). The Labour Market Panel combines rich data on individual and household
characteristics (including the age, highest completed level of education and ethnicity of
each household member), with data on various types of income (e.g. wages, profits, and a
number of different benefits) and the number of contractual working hours.18
16
Studies using continuous labour supply choices and piecewise-linear budget constraints need to impose global
quasi-concavity of preferences ex ante, which may have led to upward biased estimates of labour supply elasticities
in these studies (MaCurdy, Green and Paarsch, 1990).
17
We allocate individuals working [0,5) hours to 0 hours, individuals working [5,13) hours to 8 hours, individuals
working [13,21) hours to 16 hours, individuals working [21,29) hours to 24 hours, individuals working [29,37) hours
to 32 hours and individuals working 37 hours or more to 40 hours.
18
Unfortunately, the Labour Market Panel does not contain information on childcare.
We make the following selections. We drop all individuals < 20 years of age and all
individuals 58 years of age and older.19 We also drop students and same sex households.20
Furthermore, we drop households for which we have missing demographic or wage infor-
mation. In addition, we drop households where one of the partners is retired, on disability
benefits or self-employed, because they are not free in their labour supply choice or we
cannot calculate their budget constraint. Finally, when there is a time gap for a household
in the panel, we only keep the observations of the longest period. After these selections are
made, we are left with a sample of approximately 320,000 individuals and over one million
observations. We use this sample to estimate the wage equations. Descriptive statistics of
the sample and the estimated wage equations are given in the Online Appendix. For the esti-
mation of the structural parameters, we use a random subsample to limit the computational
burden.
For each discrete household labour supply option, we calculate disposable household
income using the MIMOSI model of CPB Netherlands Bureau for Economic Policy Anal-
ysis (Romijn et al., 2008). MIMOSI is the official tax-benefit calculator of the Dutch
government, and takes into account all (national21 ) taxes and transfers for individuals in
households.22 This includes the standard tax brackets and the associated tax rates, numer-
ous tax credits targeted at specific groups (like tax credits for families with children and
additional tax credits for single parents) and a number of income-dependent subsidies (like
subsidies for healthcare costs and subsidies for families with children). In line with the tax-
benefit system, disposable household income cannot fall below the social assistance level.
This is particularly relevant for singles without children and single parents, as working
only a few days per week generates little additional revenue for this group. For simplicity,
we treat all premiums as taxes.23
In 2001, there was a major tax reform in the Netherlands.24 This generates major
exogenous variation in the budget sets of households in the data period. Key elements of
the tax reform were a reduction in marginal tax rates, an increase in in-work benefits and
a shift from tax allowances to tax credits. These changes increased the financial incentives
to supply more labour, both on the extensive and the intensive margin. Below we give a
more detailed account of the reform.
The Netherlands has an individualized progressive income-tax system, with the excep-
tion of some tax credits and allowances that can be transferred between partners. As shown
in Table 1, there are four tax brackets both before and after the reform, with increasing
statutory rates. The reform reduced tax rates in the two highest brackets by 8 percentage
19
Individuals 58 years of age and older were directly affected by the changes in early retirement benefits in the
data period.
20
We drop same sex households for computational reasons, we cannot use gender to estimate preferences separately
for both partners.
21
Local taxes account for only a small portion of total taxes in the Netherlands (3.7% in 2002, European Union,
2015).
22
The disposable household incomes we obtain are yearly numbers, and division by 52 gives the weekly incomes
corresponding to the weekly hours that we want to explain. For computational reasons, income is then divided by
100 again in the estimation of preferences.
23
Hence, we ignore that part of the premiums that are deferred payments. Indeed, we ignore that there is often a
direct link between the individual premiums paid and the individual benefits received (Summers, 1989).
24
A detailed overview of the 2001 tax reform (in Dutch) can be found in Tweede Kamer (2005).
8 Bulletin
TABLE 1
Changes in the tax system: 1999–2005
Prereform Postreform
1999 2000 2001 2002 2003 2004 2005
Bracket rates (in %)
Income bracket 1 35.75 33.90 32.35 32.35 32.35 33.40 34.40
Income bracket 2 37.05 37.95 37.60 37.85 37.85 40.35 41.95
Income bracket 3 50.00 50.00 42.00 42.00 42.00 42.00 42.00
Income bracket 4 60.00 60.00 52.00 52.00 52.00 52.00 52.00
Bracket lengths (in C)

Income bracket 1 6,807 6,922 14,870 15,331 15,883 16,265 16,893
Income bracket 2 21,861 22,233 27,009 27,847 28,850 29,543 30,357
Income bracket 3 48,080 48,898 46,309 47,745 49,464 50,652 51,762
Income bracket 4 ∞ ∞ ∞ ∞ ∞ ∞ ∞
Income tax allowances and creditsa (maximum in C)

General allowance 3,993 4,061 – – – – –
General credit – – 1,576 1,647 1,766 1,825 1,894
Single parent allowanceb 3,042 3,094 – – – – –
Single parent creditb – – 1,261 1,301 1,348 1,381 1,401
Earned income tax allowances and credits (maximum in C)
General allowancec 1,440 1,605 – – – – –
General creditd – – 920 949 1,104 1,213 1,287
Single parent allowancee 3,042 3,094 – – – – –
Single parent creditf – – 1,261 1,301 1,348 1,381 1,401
Parent creditg – – 138 190 214 224 228
Additional parent credith – – – – – – 389
Notes: aTax allowances reduce taxable income (the financial gain depends on the marginal tax rate), tax credits reduce
the amount of taxes paid (the financial gain does not depend on the marginal tax rate). b Single parent with a dependent
child < 27 years of age. c Maximum tax allowance for working individuals. The tax allowance is 12% of gross earned
income, up to the maximum. d Maximum tax credit for working individuals. The phase-in rate is (approximately)
1.7% up to 50% of the annual minimum wage, and 11% of gross earned income beyond 50% of the annual minimum
wage, up to the maximum. e Maximum tax allowance for working single parents with a dependent child < 12 years of
age. The tax allowance is 12% of gross earned income, up to the maximum. f Maximum tax credit for working single
parents with a dependent child < 12 years of age in the year 2001 and < 16 years of age in the years beyond 2002.
The tax credit is 4.3% of gross earned income, up to the maximum. gTax credit for working parents with a dependent
child < 12 years of age. The tax credit is independent of gross earned income, provided gross earned income exceeds
(approximately) 25% of the annual minimum wage. hTax credit for working single parents and secondary earners
with a dependent child < 12 years of age. The tax credit is independent of gross earned income, provided gross earned
income exceeds (approximately) 25% of the annual minimum wage.
points, which reduced the effective marginal tax rates (EMTRs) for higher income indi-
viduals, as illustrated in Figure 1. However, because the income threshold of the fourth
bracket was decreased, some of the individuals with a taxable income in the third bracket
in the prereform period witnessed a small increase in their EMTR, see again Figure 1. The
reform also reduced the EMTRs for lower incomes. In part this was due to the increase in
the bracket length of the first tax bracket, and in part this was due to the introduction of an
earned income tax credit that was more generous than the prereform general tax allowance
for earned income. The reduction in EMTRs for a large part of the working population
70
%
60
50
40
30
20
10
0
0 10000 20000 30000 40000 50000 60000 70000 80000
Taxable income (in euro)
2001 2000
Figure 1 Effective marginal tax rates in 2000 and 2001

Source: Bosch and Van der Klaauw (2012). Note: only includes individual allowances and tax credits.
made it more attractive to work more hours, provided that the substitution effect dominated
the income effect.
The reform also increased the financial incentives to enter employment. In addition to
the reduction in statutory rates, the introduction of the earned income tax credit increased
the financial return from working for all workers. Furthermore, the reform introduced a
tax credit for working parents with a youngest child up to 12 years of age. This credit was
relatively small when it was introduced, but was then gradually increased over the period
2001–05. This made working more attractive for parents with young children. The end of
our sample period (2005) then also witnessed the introduction of a tax credit for secondary
earners and single parents with a youngest child <12 years of age, which further improved
their financial incentives to start working.
Finally, the reform increased the financial incentives for non-working partners in cou-
ples to start working, due to the shift from tax allowances to tax credits. Before the reform,
non-participating partners in couples could transfer their general allowance to their part-
ner, whereas secondary earners could not. This implied a large financial penalty for non-
participating partners that started to work; the financial gain of the general tax allowance
was typically greater for non-participating partners than for secondary earners. After the
reform this penalty disappeared because the financial gain of the general tax credit was the
same for secondary earners as for non-participating partners. Figure 2 shows the change in
net disposable household income for different levels of income for secondary earners, sep-
arately for secondary earners with a partner earning 1, 3 or 5 times the minimum wage.25
For all income levels, disposable household income when working increased due to the
reform. Furthermore, the increase in the financial gain was larger for secondary earners of
partners with a relatively high income (because the difference in the EMTRs between the
primary and secondary earner was then larger).
25
In the year 2000, the gross annual minimum wage was 14,271 euro.
10 Bulletin
6000
Change in disposable income (in euro)

5000
Partner at 5x minimum wage

4000
3000 Partner at 3x minimum wage
2000
Partner at minimum wage
1000
0
0 6000 12000 18000 24000 30000 36000 42000 48000 54000 60000
Taxable income (in euro)
Figure 2 Change in disposable household income from 2000 to 2001, by 2000 income
Source: Bosch and Van der Klaauw (2012).
The tax reform was (partly) financed with an increase in the standard VAT rate, from
17.5% to 19%, and by an increase in taxes on the use of energy. This resulted in an increase
in inflation (Vrijburg, Mellens and Dijkstra, 2014). In the estimations we account for these
price changes by using real disposable household income in 2005 prices.
IV. Estimation results

We estimate the preferences that best explain the observed labour supply choices. The size
of the data set allows us to estimate preferences separately for the following key groups
on the labour market: (i) singles without children, (ii) single parents, (iii) couples without
children and (iv) couples with children. Below we show that it is important to distinguish
between these groups. Indeed, we uncover large differences in behavioural responses that
are muffled when the groups are pooled in the regression. We discuss the results for each
group in turn.
Singles without children

First consider the results for singles without children, see Table 2.26 We find positive and
diminishing marginal utility of (log) income. For just a small share of the observed choices
(3.6%), we find a negative marginal utility of income. For leisure, we use a cubic function,
because a quadratic function generated a poor fit of hours worked at the top of the hours
distribution. The first-, second- and third-order terms in leisure are all positive. However,
due to the negative coefficient on the interaction term between income and leisure, a large
share of singles (43.9%) still has a negative marginal utility of leisure in the observed
choice. However, this is not a problem per se, as theory does not require it to be positive
(Van Soest, Das and Gong, 2002). Working more hours may have benefits beyond income.
26
We first estimated preferences for single men and women without children separately. This yielded very similar
results, therefore we decided to pool the data for single men and single women.
TABLE 2
Estimated preference parameters: singles without children and single parents
Variable Singles without children Single parents
Parameter Estimate Parameter Estimate
Income y 2.502*** y 1.037**
y 0.109
(Income)2 yy −1.847*** –
Leisure lc 88.35*** cl −58.53***
× (Age – 38)/10 la 0.913*** al −0.716***
× (Age – 38)2 /100 laa 1.652*** aa
l −0.142
× 1(Youngest child 0–3) – – 03
l 13.08***
l 13.03
cl −185.0
(Leisure)2 ll 636.2***
(Leisure)3 lll 1413***
Income × leisure yl −17.90*** yl −45.68***
Fixed costs of work fcc 0.314 cfc −1.035***
× 1(Lower educated) fce −0.934*** efc −1.395***
× 1(Native) fcn 0.876*** nfc 0.462***
fc −1.591***
fc −0.377***
Observations 4,000 4,000
Log likelihood −5, 510 −5, 370

Chosen options with Uyd < 0 3.6% 0.0%

Chosen options with Uld < 0 43.9% 0.0%
Notes: Income and leisure are in logs. * denotes significant at 10% level, ** at 5% level and *** at 1% level.
Furthermore, the inclusion of fixed costs of work complicates the interpretation of the
coefficients on leisure (Bargain et al., 2014). The coefficient of the interaction term between
leisure and (age – 38) suggests that older singles have a higher marginal utility of leisure
than younger singles, whereas the interaction term between leisure and (age – 38)2 tilts the
marginal utility of leisure up at both ends of the age distribution. Finally, fixed costs of
work are insignificant for the base group of singles, but higher for lower educated singles
and single immigrants.27 Figure 3 shows that the model for singles fits the data well.28
Table 3 gives the simulated labour supply elasticities. For the whole group of singles
without children, we find an elasticity for total hours worked of 0.35, where the extensive-
margin elasticity is much larger (0.27) than the intensive-margin elasticity (0.08).29 Turn-
ing to the subgroups, we see that single men have a somewhat lower elasticity than single
women. This is mostly due to a difference in the extensive-margin elasticity, which, as we
27
Lower educated individuals are defined as having lower vocational training (the Dutch abbreviation is VMBO)
or less.
28
Restricting the third-order term in leisure to be zero, a quadratic specification causes the model to predict too
many singles at the 40 hours option and too few singles at the 32 hours option, see the Online Appendix.
29
Since Heckman (1993) this has been considered a stylized fact in the labour supply literature (see also Bargain
et al., 2014). However, Chetty (2012) has recently shown that friction costs have a first-order effect on the participation
decision and only a second-order effect on the hours-per-week decision, which implies that the difference in the ‘true’
(frictionless) elasticity on the extensive and the intensive margin may be smaller than previously thought.
12 Bulletin
Fig. 3. Predicted and observed frequencies hours classes
TABLE 3
Labour supply elasticities: singles without and with children
Singles without children Singles parents
Total Extensive Intensive Total Extensive Intensive
All 0.35 0.27 0.08 0.61 0.43 0.18
Male 0.32 0.24 0.08 0.46 0.33 0.13
Female 0.38 0.29 0.09 0.63 0.44 0.18
Lower educated 0.73 0.60 0.13 0.98 0.71 0.25
Higher educated 0.25 0.17 0.07 0.48 0.32 0.15
Native 0.32 0.23 0.08 0.56 0.38 0.17
Immigrant 0.56 0.47 0.09 0.78 0.58 0.20
First wage quartile 0.67 0.52 0.14 1.05 0.76 0.27
Second wage quartile 0.42 0.33 0.09 0.87 0.62 0.24
Third wage quartile 0.26 0.19 0.07 0.55 0.36 0.19
Fourth wage quartile 0.16 0.11 0.05 0.41 0.28 0.12
Age 20–28 0.43 0.32 0.11 1.01 0.74 0.26
Age 29–40 0.27 0.20 0.07 0.70 0.49 0.20
Age 41–57 0.35 0.27 0.07 0.52 0.36 0.16
Youngest child 0–3 – – – 1.03 0.84 0.18
Youngest child 4–11 – – – 0.63 0.43 0.18
Youngest child 12–17 – – – 0.51 0.33 0.17
Notes: Simulated labour supply elasticities following an increase of 10% in gross hourly wages. ‘Total’is the elasticity
of total working hours, ‘Extensive’ is the participation elasticity, ‘Intensive’ is the hours-per-employed elasticity.
will see below, explains most of the differences across other subgroups as well. Lower ed-
ucated singles, singles that were born outside the Netherlands, and singles with a relatively
low wage have a relatively high labour supply elasticity. The extensive margin plays a more
important role for these groups. Finally, when looking at three age groups (20–28, 29–40
and 41–57), we find that the elasticity of the youngest and the oldest group of workers is
somewhat higher, consistent with the findings in Blundell et al. (2011).30
30
Note that we exclude individuals aged 58 and over; labour supply elasticities close to retirement might be higher
still.
Fig. 4. Predicted and observed frequencies hours classes Single parents
Single parents
Next, we consider the results for single parents. Their estimated preferences are also given
in Table 2. The translog specification performs rather poorly in economic terms, with a large
share of single parents having a negative marginal utility of income in the observed choices
(61.3%, see the Online Appendix). For single parents we therefore present estimates of a
Box–Cox specification that forces marginal utility of income (and leisure) to be positive.
We find that the power term for income, y , is close to 0, hence close to a simple log-linear
(Stone–Geary) specification. The coefficient on the exponent in front of leisure cl is a large
negative number, bringing the exponent term close to zero. Here we see that the Box–
Cox specification forces marginal utility of leisure to stay positive. The value of leisure
falls somewhat in age. Having a youngest child 0–3 years of age increases the value of
leisure time, and the same holds for a youngest child 4–11 years of age (though the latter
coefficient is not significantly different from zero). For single parents, fixed costs of work
reduce utility, and even more so when the single parent is lower educated or an immigrant,
in line with the results for singles without children. Furthermore, having a young child
also raises the fixed costs of working, in particular when the youngest child is 0–3 years of
age. These fixed costs may reflect childcare expenditures, which unfortunately we do not
observe in our data set. Figure 4 shows that the Box–Cox model, despite being less flexible
than the translog specification, still gives a good fit.
The simulated labour supply elasticities for single parents are reported in Table 3.
We find relatively high labour supply elasticities for single parents, in line with studies
on single parents in other countries (Meghir and Phillips, 2010). The extensive-margin
elasticity is again larger than the intensive-margin elasticity, and both are larger for single
parents than for singles without children. Turning to the subgroups, elasticities are higher
for single mothers than for single fathers, noting that single parents are predominantly
female.31 Lower educated single parents have a much higher labour supply elasticity than
higher educated single parents, and the same pattern is visible in the elasticities by income
31
Over 80% of single parents in the Netherlands are female (http://www.statline.nl). Children of divorced/separated
parents typically reside with their mother.
14 Bulletin
TABLE 4
Estimated preference parameters: couples without and with children
Couples without Couples with
children children
Variable Parameter Estimate Estimate
Income y −6.431 12.45***
(Income)2 yy 1.498** −1.083*
Leisure male lcmm −121.3*** −42.19*
× (Age male – 38)/10 lamm 0.416 2.078***
× (Age male – 38)2 /100 lamm am −0.405 −1.370***
× 1 (Youngest child 0–3) l03 – 1.205
× 1 (Youngest child 4–11) l411 – 0.759
(Leisure male)2 lm lm −26.00 −87.47***
c
Leisure female lff −79.26*** −0.231
a
× (Age female – 38)/10 lff 4.855*** −0.367
a a
× (Age female – 38)2 /100 lff f 2.137*** 1.603***
× 1 (Youngest child 0 – 3) l03 – 2.138*
× 1 (Youngest child 4 – 11) l411 – 2.488***
(Leisure female)2 lf lf −54.45*** −114.4***
Income × leisure male ylm 11.11*** 0.980
Income × leisure female ylf 2.685 −4.543
Leisure male × leisure female lm lf 4.629*** −0.747
Fixed costs male fccmm −7.405*** −7.814***
× 1(Lower educ. male) fcemm −0.317 −0.088
× 1(Native male) fcnmm 1.328*** 1.573***
c
Fixed costs female fcff −3.264*** −3.001***
e
× 1(Lower educ. female) fcff −0.862*** −0.913***
n
× 1(Native female) fcff 0.348*** 0.525***
Observations 2,000 2,000
Log likelihood −4, 943 −5, 135

Chosen options with Uyd < 0 0.0% 0.0%

Chosen options with Uldm < 0 100.0% 12.0%

Chosen options with Uldf < 0 100.0% 41.2%
Notes: Income and leisure are in logs. * denotes significant at 10% level, ** at 5% level
and *** at 1% level.
quartiles. For single parents, we do not find a U-shape for the elasticity in age. Indeed,
the elasticity declines monotonically with age, which is in part due to the relation between
the age of the parent and the age of the youngest child. Indeed, we find that single parents
with the youngest children (0–3 years of age) have the highest labour supply elasticity and
single parents with the oldest (dependent) children (12–17 years of age) have the lowest
labour supply elasticity within the group of single parents.
Couples without children

Moving from singles to couples, we first turn to couples without children. Table 4 gives
the estimated preference parameters. The utility functions now distinguish between leisure
of the male and leisure of the female, and between fixed costs of work for the male and
TABLE 5
Labour supply elasticities couples without children
Male own Female cross Female own Male cross
Total Ext. Int. Total Ext. Int. Total Ext. Int. Total Ext. Int.
All 0.07 0.07 0.00 −0.03 −0.01 −0.02 0.25 0.21 0.05 −0.03 −0.01 −0.02
Lower educated 0.10 0.10 0.00 0.03 0.05 −0.02 0.41 0.35 0.05 0.00 0.01 −0.01
Higher educated 0.06 0.06 0.00 −0.04 −0.02 −0.02 0.22 0.16 0.05 −0.04 −0.02 −0.02
Native 0.06 0.06 0.00 −0.03 −0.01 −0.02 0.25 0.20 0.05 −0.03 −0.01 −0.02
Immigrant 0.18 0.19 0.00 0.03 0.04 −0.02 0.27 0.22 0.05 −0.03 −0.01 −0.01
First wage quartile 0.08 0.08 0.00 0.01 0.02 −0.01 0.25 0.21 0.04 −0.01 0.00 −0.01
Second wage quartile 0.07 0.07 0.00 −0.01 0.00 −0.02 0.24 0.18 0.05 −0.03 −0.01 −0.02
Third wage quartile 0.07 0.07 0.00 −0.03 −0.01 −0.02 0.24 0.19 0.05 −0.04 −0.02 −0.02
Fourth wage quartile 0.06 0.06 0.00 −0.07 −0.04 −0.03 0.29 0.23 0.06 −0.03 −0.02 −0.02
Age 20–28 0.04 0.04 0.00 0.00 0.01 −0.01 0.11 0.06 0.05 −0.04 −0.02 −0.02
Age 29–40 0.05 0.05 0.00 −0.02 0.00 −0.02 0.14 0.08 0.06 −0.06 −0.04 −0.02
Age 41–57 0.08 0.08 0.00 −0.04 −0.02 −0.03 0.40 0.33 0.07 −0.01 0.00 −0.01
of total working hours, ‘Ext.’ is the participation elasticity, ‘Int.’ is the hours-per-employed elasticity. For the male
own and female cross elasticity we use the education, ethnicity and age of the male, for the female own and male
cross elasticity we use the education, ethnicity and age of the female.
the female. Furthermore, we allow for an interaction term between the leisure of both
partners. The first-order term in log income is slightly negative, but insignificant, and the
second-order term is positive and significant. In the end, all chosen options have a positive
marginal utility of income. The first- and second-order terms in leisure are negative for
both partners and all chosen options have negative marginal utility of leisure.32 Age is
important for the marginal utility of leisure of females, but much less so for men. Ceteris
paribus, partners derive utility from spending leisure time together. Furthermore, there is
a positive relation between income and leisure for both men and women. Both for men
and women in couples, we find significant fixed costs of working, that increase when the
person is lower educated or when the person is an immigrant. Figure D.1 and D.2 in the
Online Appendix give the fit for men and women in couples without children, respectively.
The predictions line up well with the data.
Table 6 gives the corresponding simulated labour supply elasticities for couples without
children. We consider the own and cross labour supply elasticities when increasing the
gross wage of the men and the women respectively. The own wage elasticity for men in
couples without children is rather small (0.07), with the intensive margin elasticity close
to zero. The own wage elasticity for women is much larger (0.25), though still smaller
than for single women without children. We see the same pattern by education and being
an immigrant as for singles and single parents, but the differences across wage quartiles
are less pronounced. For both men and women in couples without children, the elasticity
rises with age, which is quite different from the pattern we observed for singles with and
32
However, note again that part of the marginal utility of leisure in the decision of whether or not to work is
captured by the fixed costs of work dummy. Pooling couples with and without children, Brewer et al. (2006) find
quite a similar pattern for the shares of marginal utility in income and leisure. Specifically, they find a very small
share (1%) of observed choices with negative marginal utility of income, but a very large share (90%) of observed
choices with negative marginal utility of leisure for men and women.
16 Bulletin
TABLE 6
Labour supply elasticities couples with children
Male own Female cross Female own Male cross
Total Ext. Int. Total Ext. Int. Total Ext. Int. Total Ext. Int.
All 0.13 0.13 0.00 −0.18 −0.12 −0.06 0.44 0.34 0.10 −0.02 0.00 −0.02
Lower educated 0.25 0.24 0.01 −0.13 −0.07 −0.06 0.65 0.53 0.11 0.02 0.03 −0.01
Higher educated 0.11 0.11 0.00 −0.19 −0.13 −0.06 0.39 0.30 0.10 −0.04 −0.02 −0.02
Native 0.09 0.08 0.00 −0.20 −0.14 −0.06 0.40 0.30 0.09 −0.03 −0.01 −0.02
Immigrant 0.42 0.42 0.00 −0.08 −0.03 −0.05 0.57 0.45 0.11 −0.01 0.01 −0.02
First wage quartile 0.21 0.21 0.00 −0.15 −0.10 −0.06 0.57 0.45 0.11 0.01 0.02 −0.02
Second wage quartile 0.13 0.13 0.00 −0.16 −0.10 −0.05 0.43 0.33 0.10 −0.02 0.00 −0.02
Third wage quartile 0.11 0.11 0.00 −0.19 −0.13 −0.06 0.41 0.32 0.09 −0.04 −0.01 −0.02
Fourth wage quartile 0.09 0.09 0.00 −0.21 −0.15 −0.06 0.37 0.28 0.09 −0.04 −0.02 −0.02
Age 20–28 0.17 0.16 0.01 −0.22 −0.15 −0.07 0.51 0.40 0.11 0.01 0.02 −0.01
Age 29–40 0.14 0.14 0.00 −0.18 −0.12 −0.06 0.44 0.34 0.10 −0.03 −0.01 −0.02
Age 41–57 0.12 0.12 0.00 −0.18 −0.12 −0.06 0.42 0.32 0.09 −0.03 −0.01 −0.02
Youngest child 0–3 0.15 0.14 0.00 −0.20 −0.14 −0.06 0.43 0.33 0.10 −0.03 −0.01 −0.02
Youngest child 4–11 0.15 0.15 0.00 −0.16 −0.11 −0.05 0.46 0.36 0.10 −0.02 0.00 −0.02
Youngest child 12–17 0.10 0.10 0.00 −0.18 −0.13 −0.05 0.41 0.31 0.09 −0.02 0.00 −0.02
of total working hours, ‘Ext.’ is the participation elasticity, ‘Int.’ is the hours-per-employed elasticity. For the male
own and female cross elasticity we use the education, ethnicity and age of the male, for the female own and male
cross elasticity we use the education, ethnicity and age of the female.
without children. We find that cross-elasticities are typically negative and small for couples
without children.33
Couples with children

Finally, Table 4 also gives the estimated preference parameters for couples with children.
We find positive and decreasing marginal utility of (log) income for this group. In all
observed choices the marginal utility of income is positive. The first- and second-order
terms in (log) leisure are negative, which results in a substantial share of the observed
choices having negative marginal utility of leisure. The marginal value of leisure further
depends on age, in particular for men. We also find that having a youngest child 0–3 years
of age or 4–11 years of age raises the value of leisure, relative to the base group of couples
with a youngest child 12–17 years of age, and the effect is larger for mothers than fathers.
The interaction term of leisure for the male and the female is negative, though insignificant.
This contrasts with the results for couples without children, where there was a significant
positive effect of complementary leisure. This may capture that when parents spend more
leisure time together, their expenditures on childcare rise. For both men and women in
couples with children, we find significant fixed costs of working, again higher for lower
educated and immigrants (though the effect of education is small and insignificant for
males). We also estimated specifications where we included interaction terms between the
33
Notable exceptions are women of lower educated men and immigrant men, where the cross-elasticity of the
men’s wage is positive, though still small.
fixed costs of work dummy and dummies for the age of the youngest child, but these were
always insignificant and also made the interaction terms between the age of the youngest
child and leisure insignificant. Figures D.3 and D.4 in the Online Appendix give the fit for
men and women in couples with children respectively. Again, the predictions line up well
with the data.
Table 6 gives the simulated labour supply elasticities for couples with children. For
couples with children, we find larger elasticities for both men and women than for couples
without children. Most of the response is again on the extensive margin, and the intensive-
margin response is much smaller, in particular for men. Furthermore, the own-wage elas-
ticity is much larger for women than for men. There is also a substantial cross-elasticity for
women in couples with children, as opposed to women in couples without children, whereas
the cross-elasticity for men is still close to zero.34 Indeed, the cross-elasticity of women is
larger than the own-wage elasticity of men. However, hours worked still rise overall when
we increase the gross wage of men in couples with children, because men in couples with
children work more hours than women in couples with children. Lower educated parents
in couples have a higher elasticity than higher educated parents in couples, and the same
picture emerges when we look at wage quartiles. For both parents, the elasticity is higher
when they are young (20–28) and somewhat smaller when they are older (41–57). The
elasticity of both the father and the mother is somewhat higher when the youngest child is
not in secondary school yet (<12 years of age), though the difference with parents with a
youngest child in secondary school (12–17 years of age) is not that pronounced. Indeed,
the differences by age of the youngest child are much less pronounced for couples with
children than for single parents.
Robustness checks
Appendix E in the Online Appendix gives some additional analyses regarding labour sup-
ply elasticities. First, we consider how the fit and labour supply elasticities vary with the
functional form of the utility function. Table E.1 gives the estimated preference parame-
ters for singles without children of four functional forms often used in empirical labour
supply studies: (i) quadratic (e.g. Brewer et al., 2006; Bargain et al., 2014), (ii) translog
(e.g. Van Soest, 1995; Flood, Hansen and Wahlberg, 2004), (iii) Box–Cox (e.g. Aaberge,
Colombino and Wennemo, 2009; Blundell and Shephard, 2012) and (iv) Box–Cox with an
interaction term between income and leisure (e.g. Dagsvik and Strom, 2006). The quadratic
and translog specification both generate labour supply elasticities that are somewhat higher
than our base specification where we extend the translog specification with a third-order
term for log leisure, see Table E.2. Indeed, without the third-order term for leisure, the
quadratic and translog specification overpredict the number of singles without children
in the full-time options, see Figure E.1. The Box–Cox specifications generate substan-
tially higher labour supply elasticities, since they restrict the marginal utility of income
and leisure to remain positive.35 Table E.3 gives the estimated preference parameters for
34
Bloemen and Stancanelli (2014) also find that cross-elasticities are substantial for women in couples with children
in France, whereas cross-elasticities are small for men in couples with children.
35
As in Blundell and Shephard (2012), we put the exponent of the coefficient in front of the log terms. This is more
restrictive than the ‘standard’ Box–Cox specification used in, for example, Aaberge et al. (2009). When we estimate
18 Bulletin
single parents for the same functional forms. All functional forms give a reasonably good
fit of the data, see Figure E.2. However, for the quadratic and the translog utility function,
the marginal utility of income is negative for a large share of the observed choices (33%
and 79% respectively). As a result, we find much lower labour supply elasticities than
in our base specification (Box–Cox 2). The Box–Cox model without an interaction term
between leisure and income generates labour supply elasticities quite similar to the base
specification.36
Table E.5 gives the standard errors on the labour supply elasticities for singles without
children and single parents. We calculate these standard errors using 60 draws for the
parameter space and bootstrapping the means of the resulting elasticities. Standard errors
are small (in the order of 0.01).37
In Table E.6 we present labour supply elasticities for the first period (1999) and the last
period (2005) in our data set. Blau and Kahn (2007) and Heim (2007) show that female
labour supply elasticities have fallen dramatically over the past decades in the US, following
the strong rise in female participation rates.38 Although our data period is relatively short,
for most subgroups we do find that labour supply elasticities have fallen over the period
1999–2005, as participation rates have risen.39
In our base specification, we prefer to use observed gross hourly wages for the employed.
We use administrative data provided by the employer on monthly wages and monthly hours
worked to calculate the gross hourly wage, hence division bias resulting from measurement
error (Ziliak and Kniesner, 1999; Keane, 2011; Löffler et al., 2014b) is unlikely to be a
major concern. However, as a robustness check,Table E.7 presents labour supply elasticities
when we use simulated rather than observed wages for the employed.40 In contrast to Löffler
et al. (2014b), we do not find that elasticities are significantly higher for all groups when
we use simulated rather than observed wages for the employed.41 The fact that we use
administrative data on both wages and hours worked and from the same source, mitigating
the potential problem of division bias, may play a role here.
Finally, in Table E.8, we present labour supply elasticities using an impulse in net
income rather than gross hourly wages. The tax system drives a wedge between the marginal
increase in gross and net income when working more hours. When we increase net income
in all options with positive hours of work by 10%, we find larger labour supply elasticities
the Box–Cox specification with just the coefficient in front of the log term, and not the exponent of the coefficient,
the labour supply elasticity (0.30) is much closer to the labour supply elasticity in our base specification (0.35).
36
We also estimated preferences for the four popular functional forms for couples. However, for couples, not all
functional forms converged. The functional forms that did converge generated labour supply elasticities quite similar
to the base (translog) specification (details available on request).
37
Standard errors for couples are small as well, in the order of 0.01–0.03 (available on request).
38
Bargain et al. (2014) further show that in a cross-section of countries, female labour supply elasticities are lower
in countries where the participation rate of females is relatively high.
39
The notable exceptions are women in couples without children, and men in couples, both with and without
children, whose labour supply elasticities have remained rather stable.
40
Using sets of 60 draws for the simulated wages, to account for the wage prediction error (Löffler et al., 2014b).
We do not estimate wages joint with preferences, because determining the set of disposable incomes in each iteration
is prohibitively time consuming (Löffler et al. (2014b) present joint estimates of wages and preferences, but use an
approximation of the tax-benefit system).
41
Indeed, most of the elasticities using simulated wages are actually lower, men and women in couples without
children being the notable exception.
than the base elasticities using an increase in gross hourly wages by 10%. Changing net
income rather than gross income is closer to the elasticity concept relevant in theory.
However, almost all discrete choice studies report simulated elasticities using an impulse
in gross hourly wages, hence for comparability we focus on the base elasticities using an
impulse in gross hourly wages.42
V. Comparison with the findings of related studies

Below we consider how our results compare to the findings of related studies. We first
compare the results with studies on Dutch data, and subsequently with the findings for
other countries.
Table 7 gives an overview of labour supply studies using Dutch data. For comparability,
we limit the overview to studies from 2000 onwards.43 This table underscores the value
added of our analysis. We use a larger data set than previous studies, which enables us
to estimate preferences for more subgroups and also enables us to study singles without
children and single parents, which have received little attention in previous studies. Also,
together with Vermeulen (2005) ours is the only study to use data from before and after
the large tax reform of 2001, which generates credible exogenous variation in budget
constraints that benefits the identification of the preference parameters.
Most studies focus on couples, and we consider this group first. In line with previ-
ous studies, we find small elasticities for total hours worked for men in couples, much
larger elasticities for women in couples, and much larger extensive-margin elasticities than
intensive-margin elasticities. However, previous studies have either pooled couples with
and without children, or have focused on couples without children only. We uncover large
differences between the labour supply elasticities of couples with and without children,
where the labour supply elasticities of couples with children are almost twice as large as
of couples without children. This information is likely to be lost when couples with and
without children are pooled in the estimation of preferences, with a limited number of
interaction terms for the presence of children. For example, Bargain et al. (2014) pool the
data for couples with and without children in the estimation of preferences, due to the small
sample size, and obtain labour supply elasticities for women in couples with and without
children that are quite similar (0.33 and 0.31 respectively).44
Our results on cross-elasticities in couples (not reported in the overview table) are in
line with previous studies. Van Soest and Das (2001), Van Soest et al. (2002) and Bloemen
(2010a, b) find small cross-elasticities for men, whereasVermeulen (2005) finds a somewhat
larger cross-elasticity for men in couples (−0.1). All studies find larger cross-elasticities
for women in couples. However, they do not distinguish between women in couples with
and without children. We show that cross-elasticities are substantially larger for women in
couples with children than in couples without children (see Tables 5 and 6).
42
Blundell and Shephard (2012) being one of the notable exceptions.
43
Older studies used data from the 1980s, when the participation rate of women was much lower.
44
Bargain et al. (2014) do not report simulated labour supply elasticities for men in couples with and without
children separately.
20
TABLE 7
Estimates of labour supply elasticities in the Netherlands
Total hours Participation Hours per employed
Study Data set Sample Data period Obs. Men Women Men Women Men Women
This paper Labour market Couples w/o childrena 1999–2005 2,000 0.07 0.25 0.07 0.21 0.00 0.04
Panel Couples with childrena 1999–2005 2,000 0.13 0.44 0.13 0.34 0.00 0.10
Singles w/o childrena 1999–2005 4,000 0.32 0.38 0.24 0.29 0.08 0.09
Singles with childrenb 1999–2005 4,000 0.46 0.63 0.33 0.44 0.13 0.18
Vlasblom et al. (2001)a OSA panel Couples {1985, 1992} 1,856 0.42 0.35
Van Soest and Das (2001) Socio-economic panel Couples 1995 4,017 0.08 0.71
Van Soest et al. (2002)b Socio-economic panel Couples 1995 1,794 1.04 0.44
Vermeulen (2005)c DNB household Couples w/o children 1995–2003 680 −0.03 0.27
Survey Singles 1995–2003 1,430 0.01 0.00
Bloemen and Kapteyn OSA panel Couples 1985 849 0.42 0.25
Bulletin
(2008)d
Bloemen (2010a)e Socio-economic panel Unmarried couples w/o 1990–2001 2,491 0.24 0.22
children
Married couples w/o 1990–2001 5,558 −0.06 0.61
children
Bloemen (2010b)f Socio-economic panel Couples w/o children 1990–2001 8,049 −0.02 0.31 0.00 0.26
Bargain et al. (2014)g Socio-economic panel Couples 1998 1,806 0.06 0.32 0.06 0.20 0.01 0.13
Singles w/o and with 1998 900 0.08 0.16 0.08 0.11 0.01 0.02
children
Notes: a Elasticities are reported in Vlasblom (1998) Table 5.12). bVan Soest et al. (2002, Table 2), estimates with second-order polynomial for the utility function. The
participation elasticity in Van Soest et al. (2002) is the change in percentage points in response to a 1% increase in the wage rate. cVermeulen (2005, Table 7), unitary
model for couples (own-wage elasticities). dAverage of the estimation results of the variant with simulated scores and the variant with discrete choices and a third-order
polynomial utility function, as reported in Bloemen (2010b, p. 27). e Bloemen (2010a, Table 7), reduced form estimates. f Bloemen (2010b, Table 8), with unrestricted
sharing rule and fixed costs. g Bargain et al. (2014, Table A8–A11), results for the Netherlands. Intensive-margin elasticities are for individuals employed in the data only
(‘pure intensive margin’).
Only two other studies consider singles without children and single parents.45 Ver-
meulen (2005) only considers the intensive-margin elasticity. He estimates small intensive-
margin elasticities for both single men and women without children, even smaller than our
estimates. Bargain et al. (2014) also find small intensive-margin responses for singles,
but also smaller extensive-margin responses than we do. Again, pooling households with
and without children muffles the heterogeneity in labour supply responses. Bargain et al.
(2014) simulate a labour supply elasticity for single women with and without children of
0.12 and 0.17 respectively.46 We do not pool single women with and without children in the
estimation of preferences and find a much bigger difference in the labour supply elasticities
between these two groups.
We can also compare our findings with the findings of two quasi-experimental studies
using the same data set. Bosch and Jongen (2013) study the intensive-margin elasticity
of labour supply, using the 2001 tax reform and the methodology developed in Blundell,
Duncan and Meghir (1998). For men in couples they find an intensive-margin elasticity of
0.01, in line with the results in Table 7. For women in couples they find an intensive-margin
elasticity of 0.13, which is close to the results for women in couples with children in Table 7
but larger than the results for women in couples without children.47 The intensive-margin
elasticity of single mothers in Bosch and Jongen (2013) is 0.21, close to the 0.18 reported
in Table 7. The intensive-margin elasticity of singles without children in Bosch and Jongen
(2013) of 0.17 is somewhat larger than the 0.09 in Table 7.
Bettendorf et al. (2014) study the extensive-margin labour supply elasticity of single
mothers with a youngest child 12–15 years of age using the extension of the eligibility
of the EITC for single parents to this group in 2002. Using differences-in-differences
and regression discontinuity they show that this reform had a negligible effect on labour
participation of single parents, suggesting an extensive-margin elasticity for this group
close to zero. In our structural model, we find an extensive-margin elasticity of 0.33 for
single mothers with a youngest child 12–17 years of age (Table 3). Clearly this is larger
than zero, but it is also much smaller than the elasticity for single parents with a youngest
child 0–3 years of age for which we find an extensive margin elasticity of 0.84 (Table 3).
Hence, both methods predict a relatively small elasticity for single parents with a youngest
child that is already in secondary school.
We conclude with a brief comparison of our results with the findings for other countries.
Excellent surveys of estimated labour supply elasticities can be found in, for example,
45
Not included in Table 7 is the study by Euwals and Van Soest (1999) on singles without children and single
parents, since it was published before 2000 (and uses data from the 1980s). Due to the small number of observations,
they pool singles without children and single parents in the estimation of preferences. In the specification that is
closest to ours (Euwals and Van Soest, 1999, Table 8, Column 1) they obtain a labour supply elasticity of 0.15 for
single men without children and 0.19 for single women without children. Consistent with our findings, they find
larger labour supply elasticities for single parents, 0.42 for single mothers and 0.18 for single fathers, than for single
men and women without children.
46
The differences in simulated labour supply elasticities for single men with and without children in Bargain et al.
(2014) are larger, 0.22 and 0.07 respectively. However, single fathers are a minority in the group of single parents:
80% of single parents in the Netherlands are women.
47
Bosch and Van der Klaauw (2012) also find that the intensive-margin elasticity of labour supply of women in
couples is small, using data from the Labour Force Survey on labour participation and data on income from the Social
Statistical Panel. Indeed, in their study the intensive-margin elasticity is not significantly different from zero.
22 Bulletin
Blundell and MaCurdy (1999), Meghir and Phillips (2010), Keane (2011), Bargain and
Peichl (2013) and Bargain et al. (2014). We compare our results with the recent estimates
for Europe and the US presented in Bargain et al. (2014).
Bargain et al. (2014) find that for married women the total hours elasticity ranges
from 0.1 to 0.6 across countries. Our estimates for women in couples with and without
children of 0.44 and 0.25, respectively, fall in this range. However, when considering
women in couples they also conclude that ‘... elasticities are only slightly larger for women
with children’ (Bargain et al., 2014, p. 738). As argued above, this may be the result of
pooling women in couples with and without children in the estimation of preferences.48
For married men the total hours elasticity ranges from 0.05 to 0.15 across countries. Our
estimates for men in couples with and without children of 0.14 and 0.07, respectively, fall
in this range.49
The elasticity of total hours worked for single men in Bargain et al. (2014) ranges from
0.0 to 0.4, and some even higher. Our estimate of 0.32 is at the upper end of this range.50
For single women without children they find an elasticity of total hours worked ranging
from 0.1 to 0.5, and again some even higher. For single women with and without children
we find an elasticity of 0.61 and 0.38, respectively, which is on the upper end of this range.
For single women Bargain et al. (2014) p. 740) conclude that ‘[S]ingle mothers tend to
have larger elasticities than childless women yet differences are usually not significant ...’.
Again, this may be the result of them pooling single women with and without children.51
Bargain et al. (2014) also find that the extensive-margin elasticity is (much) larger than
the intensive-margin elasticity. Furthermore, they find that labour supply elasticities are
higher for the lower income quintiles, especially for singles with and without children,
which is also what we find. They also find that cross-elasticities for women in couples are
non-negligible and are close to zero for men in couples. They do not report cross-elasticities
separately for women in couples with and without children.
VI. Policy implications

Our findings have a number of important policy implications, which we discuss below.52
There is a trade-off between simplicity and efficiency of the tax-benefit system. In-
deed, we uncover large differences in behavioural responses across different demographic
groups. An efficient tax system takes these differences into account, at the cost of increased
system costs. Our findings suggest that women with children are particularly responsive to
48
Studies using data on both households with and without children before Bargain et al. (2014) typically also
pooled these households in the estimation of preferences, and then included dummies for the age of the youngest
child. Unfortunately, they typically do not report labour supply elasticities separately for women with and without
children (e.g. Van Soest, 1995; Keane and Moffitt, 1998; Aaberge et al., 1999; Van Soest and Das, 2001; Van Soest
et al., 2002, all do not report elasticities separately for women with and without children).
49
Bargain et al. (2014) do not report elasticities separately for men in couples without and with children.
50
Bargain et al. (2014) do not consider elasticities for single fathers, because there are too few observations.
51
Regarding single parents, Blundell and Shephard (2012) also estimate preferences for single parents using only
data on single parents and using interaction dummies for the age of the youngest child. They find that the labour
supply elasticity falls with the age of the youngest child, which is what we find as well.
52
A quantitative analysis of policy reforms is left for future research.
changes in financial incentives. Hence, in-work benefits and (childcare53 ) subsidies targeted
at this group may benefit efficiency.54 Furthermore, as single parents seem particularly re-
sponsive, and also leave substantial benefits behind when they move into employment,
it may also be efficient to have additional tax credits and subsidies for working single
parents.55 Our results also suggest that tagging by age of the youngest child may ben-
efit efficiency when considering single parents (Akerlof, 1978; Blundell and Shephard,
2012). The labour supply elasticity of single parents with young children is much higher
than the labour supply elasticity of single parents with older children. For women in cou-
ples, the efficiency gain of tagging by age of the youngest child seems rather limited, as the
elasticities do not vary that much by the age of the youngest child. Previous studies have
typically not reported elasticities by age of the youngest child (e.g. Van Soest and Das,
2001; Van Soest et al., 2002; Bargain et al., 2014)56 , and hence policymakers may have
been largely unaware of the potential for tagging of policies by age of the youngest child
for single parents.
Participation tax rates are more important than marginal tax rates. Indeed, for all de-
mographic groups we find that the extensive-margin or participation response is much
larger than the intensive-margin or hours-per-employed response. According to optimal
tax theory, participation tax rates should then be relatively low and marginal tax rates can
be relatively high (Saez, 2002).57 One way to achieve this is to have an earned income tax
credit with a steep phase-in rate and then a steep phase-out rate, so that it is targeted at
the ‘working poor’. We should note though that for secondary earners with children and
single parents, marginal tax rates are still important determinants of hours worked. Indeed,
for these two groups, intensive margin responses are non-negligible. Hence, tax credits
and subsidies that increase with the hours worked or labour income (hence with a phase-in
range, but no phase-out range) of these groups may still be an effective way to stimulate
hours worked.
On the flip side, the relative importance of participation responses also implies that
the disincentive effects of welfare benefits are substantial, in particular for the responsive
53
A caveat with childcare subsidies is that they distort the choice between formal and informal childcare, which
reduces the effectiveness of childcare subsidies in stimulating labour participation for given budgetary costs (Blau,
2003).
54
Indeed, regarding couples, optimal tax theory suggests that tax rates should be lower on secondary earners than
on primary earners when secondary earners have a higher labour supply elasticity than primary earners (Boskin
and Sheshinski, 1983; Alesina, Ichino and Karabarbounis, 2011). However, note that our results indicate that the
difference is not due to gender, as the elasticities of single men and women without children are quite similar. Hence,
there is no efficiency gain from basing taxation on gender, but rather from basing taxation on being a primary or
secondary earner (Saint-Paul, 2008).
55
The benefits of this policy may have been less apparent from previous studies, where differences between labour
supply elasticities of singles without children and single parents were much smaller.
56
Blundell and Shephard (2012) being a notable exception.
57
It is important to note that higher incomes may respond to changes in marginal tax rates in other ways than labour
supply, via for example, effort or tax evasion, increasing the distortions from higher marginal tax rates (Feldstein,
1999). Indeed, the empirical literature suggests that the so-called elasticity-of-taxable-income, which captures not
only labour supply but also other responses, is much higher for higher incomes (Gruber and Saez, 2002; Saez
et al., 2012). Jongen and Stoel (2013) also estimate a substantial elasticity-of-taxable-income for high incomes in
the Netherlands. However, there is an active debate over whether the elasticity-of-taxable-income for high income
earners measures real distortions (Chetty, 2009; Saez et al., 2012; Piketty et al., 2014; Doerrenberg et al., 2017).
24 Bulletin
groups of singles without children and single parents. Furthermore, our results imply that
the disincentive effects of income support for single-earner couples, in particular with
children, are also relatively high. Hence, when it comes to targeted income support for
households with a relatively low income, a careful balancing of equity and efficiency
considerations is called for.
In couples with children, cross-effects are important. Indeed, we find that when the
earnings of the father go up, this substantially reduces the labour supply of the mother (but
not vice versa). This further reduces the effectiveness of lower taxes on primary earners
with children. When a policy change increases their net wage, they will hardly work more,
whereas their female partners will work substantially less. We also show that this cross-
effect is only of minor importance for couples without children, hence cross-effects are less
important for a policy change that leads to an across-the-board increase in net wages for
all primary earners than a policy change that only increases net wages for primary earners
with children.
Comparing the policy implications with the reforms in the tax-benefit system in the
Netherlands over the past decade, many of the reforms appear to have been rather effective
in terms of increasing labour supply. The Dutch government has intensified tax credits
for secondary earners with children and single parents, and increased childcare subsidies
(see Bettendorf, Jongen and Muller, 2015, for an overview and an analysis of the impact
of these reforms using differences-in-differences). Furthermore, the participation tax rate
was reduced by increasing the (general) earned income tax credit. Also, the earned income
tax credit was targeted more at the elastic group of workers at the bottom of the labour mar-
ket. However, not all reforms were beneficial for labour supply. In particular, the increase
in targeted income support for households with children with a relatively low household
income has increased participation tax rates and marginal tax rates for (potential) sec-
ondary earners. Our findings indicate that the resulting distortions of this reform are larger
than previously thought, since households with children appear particularly responsive to
changes in financial incentives.
VII. Conclusion
A large administrative household panel data set has enabled us to estimate the labour supply
elasticities for a large number of subgroups on the Dutch labour market. The identification
benefits from a major tax reform in the sample that led to major exogenous variation in
household budget constraints. We find that the labour supply elasticity of men and women is
quite similar when they are single. However, men in couples have much smaller elasticities
than women in couples. Furthermore, cross-elasticities of men’s wages on women’s labour
supply are non-negligible in couples with children (but not vice versa, and not for men and
women in couples without children). We find the highest labour supply elasticities for single
parents, in particular for single parents with preschool age children. For all subgroups we
find that low-skilled men and women have much higher labour supply elasticities than their
high-skilled counterparts, and that the extensive or participation response is much larger
than the intensive or hours-per-week response.
We also uncover differences in labour supply elasticities between households with and
without children that are much larger than previous studies. Due to the small number
of observations, previous studies had to pool these household types58 when estimating
preferences (adding a few interaction terms for age of the youngest child), and they find
relatively small differences in the labour supply elasticities between these groups. Not
pooling the data, and hence allowing all preference parameters to vary between households
with and without children, we find that the labour supply elasticities of households with
children are almost twice as high as the labour supply elasticities of households without
children.
Our findings have a number of important policy implications. Given the substantial
heterogeneity in responses across different demographic groups and decision margins, an
efficient tax system should not be too simple. Targeting in-work benefits and subsidies at
single parents and secondary earners (in particular with children) is much more effective in
terms of labour supply than targeting them at all workers. Marginal tax rates are much less
distortionary for labour supply than participation tax rates.59 Therefore, targeting in-work
benefits at lower incomes is relatively effective. On the flip side, the distortions of welfare
benefits on the labour supply of singles without children and single parents, and of income
support for single-earner couples on the labour supply of potential secondary earners, are
relatively high. Hence, a careful balancing of equity and efficiency is called for. Finally,
cross-effects of men’s earnings on women’s labour supply are important in couples with
children, making tax relief for primary earners with children less effective.
Interesting directions for future research remain. Our data set does not contain data on
childcare. This is unfortunate, since we find that the presence of children in the household
plays a crucial role in the labour supply responses. Constructing a data set with childcare
information and estimating a model for the simultaneous choice of labour supply and
childcare would be an interesting next step (Kornstad and Thoresen, 2006). Also, studies
have shown that demand-side restrictions may affect responses to changes in financial
incentives (Aaberge et al., 1999; Creedy and Duncan, 2005; Bargain et al., 2010; Peichl
and Siegloch, 2012; Colombino, 2013). With information on, for example, job search, it
would be interesting to separate chance and choice when it comes to labour participation.
Previous studies have also shown that non-take-up (due to e.g. the potential stigma of being
on welfare) of benefits may be an important element to consider (Hoynes, 1996; Keane
and Moffitt, 1998). This too is an interesting topic for future research. Furthermore, our
model is static; this precludes an analysis of life-cycle responses, including human capital
formation and retirement, another interesting direction for future research (Keane, 2011).
Finally, it would also be interesting to study how other decision margins than labour supply
and human capital formation are affected by the tax-benefit system. The first estimates of
the elasticity-of-taxable-income for the Netherlands are presented in Jongen and Stoel
(2013). We will use the results in this paper and subsequent studies in the construction of
a new microsimulation model at CPB Netherlands Bureau for Economic Policy Analysis
to simulate tax-benefit reforms, along the lines of, for example, the MITTS model for
Australia (Creedy et al., 2002) and the IZAMOD model for Germany (Löffler et al.,
2014a).
Final Manuscript Received: September 2016

58
Or they focus only on households without children.
59
Though marginal tax rates may cause other distortions (Feldstein, 1999; Saez et al., 2012).
26 Bulletin
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Supporting Information
Additional supporting information may be found in the online version of this article:
Appendix S1: Supplementary material.

Heterogeneity in Labour Supply Responses: Evidence From A Major Tax Reform

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OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 0305–9049

Heterogeneity in Labour Supply Responses: Evidence

†VU University Amsterdam, De Nederlandsche Bank and Netspar, De Boelelaan 1105,

JEL Classiﬁcation numbers: C25, C52, H31, J22

II. Structural model

y(wm hm , wf hf , T ) = wm hm + wf hf − T (wm , hm , wf , hf ; X), (3)

III. Data set and tax reform

Bracket lengths (in C)

Income tax allowances and creditsa (maximum in C)

Figure 1 Effective marginal tax rates in 2000 and 2001

Change in disposable income (in euro)

Partner at 5x minimum wage

3000 Partner at 3x minimum wage

IV. Estimation results

Singles without children

Fig. 3. Predicted and observed frequencies hours classes

Fig. 4. Predicted and observed frequencies hours classes Single parents

Couples without children

Couples with children

V. Comparison with the ﬁndings of related studies

VI. Policy implications

Final Manuscript Received: September 2016

Appendix S1: Supplementary material.

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