Can a new working mother tax credit in Spain modify women’s labour supply?

1. Can a new working mother tax credit in Spain modify women’s labour supply? 2nd Microsimulation Research Workshop 11-12 Oct 2012, Bucharest, Romania L. Ayala (URJC) and M. Paniagua (IEF - URJC)

2. Introduction • In-workbenefits • Definition • Previousexperiences • The WMTC in Spain • Definition of a new IWB • Methodology • Data • Simulation • Conclusions

3. Introduction: family support public expenditure in Spain • Spain is one of the countries in Europe with the lowest family benefits. Fuente: Infancia en Cifras, 2009. Cuentas integradas de protección social en términos SEEPROS. Eurostat.

4. Introduction: female activity rates – a comparison

5. Introduction: low-income workers Spain is one of the European countries with the smallest salary mean

6. Introduction: female poverty rates – a comparison

7. Introduction: motivation • Withinthisframe -> needtofindpoliciesgatheringboththeincrease in femaleactivityrates and enlarging salaries forlow-incomeworkers. • Alternatives – firstapproach: IN-WORK BENEFITS (positive experiences in general terms)

8. In-work benefits • Definition • Employment conditional benefits • Dependent children also considered • Aim at low income families – low wage earners • Target: increase labour supply and redistribute income towards low income families (poverty reduction) • Different ways of designing IWBs – depending on the target group

9. In-work benefits • Definition • According to Saez (2002) the optimal IWB has the following form:

10. In-work benefits • Previous experiences • Long tradition in Anglo-saxon countries • Other OECD countries start to implement IWB • Mediterranean countries have little history implementing IWBs • In Spain the closest program to an IWB is the working mother tax credit

11. In-work benefits • The working mother tax credit in Spain • Introduced in 2003, is a refundable tax credit for working mothers with children under 3. • The condition to be elegible is paying social security contributions (thus being working) • If the contributions are defined by the variable “sic” (monthly) the tax credit is min(sic,100 euros) monthly.

12. In-work benefits • The working mother tax credit in Spain

13. In-work benefits • The working mother tax credit in Spain

14. In-work benefits • A new IWB (remove WMTC)

15. Methodology • EUROMOD as the static microsimulation tool to calculate disposable income, before and after the new in-work benefit. • The model takes into account individuals’ behaviour within the labour market: • The individuals’ preferences are represented by a direct utility function. • The individual has also a budget constraint defined in terms of hours worked, the gross wage rate, total hh income and the tax system.

16. Methodology • Maximazing the utility taking into account the budget constraint (not an easy issue) • Use discrete approach (Van Soest, 1995; Aaberge et al., 1995) where individuals maximize their utility by selecting the number of hours they wish to worksubject to the constraint that only a discrete number of hours levels are available: • The utility has a random term, since the determinants of any individual’s behaviour can never be known with certainty. Therefore: • where is the measured utility and the error term

17. Methodology • Quadratic form for the deterministic part of the utility function: • Observed heterogeneity enters through the parameters of income and hours within the utility function:

18. Methodology • Within this framework there is a probability distribution over available hours level influenced by the properties of the

19. Methodology • If follows the EVD: • The specification is the multinomial logit • Elasticities are measured on expected hours work • Need data for the estimations

20. Data • Spanish module of the EU_SILC 2006 (2005 income) • Target group: • women (utility maximization takes place at hh level but males are considered inelastic) • aged in [18,50] • no self-employed • with children in [0,3] • Sample of 1.128

21. Simulation For those not working need to estimate wages -> Heckman’s method to correct selection bias • Three scenarios: • Baseline (2005 policies - WMTC) • IWB reform without behavioural changes • IWB + LS

22. Simulation • Calibration of error term: given the estimated preferences I keep 80 “good” draws from the error term. • Good means that the maximization of new utilities (considering deterministic part and random error) takes place at the observed hours point. • If the draw is good, it’s used to derive preferred choice after the reform. • individual transition probabilities can be approximated by taking the mean of the predicted transitions between hours in the budget over the 80 repetitions.

23. Simulation Heckman method to estimate wages for those not in employment

24. Simulation Conditional logit

25. Simulation Transition probabilities

26. Simulation Results on income distribution

27. Simulation At-risk-of-poverty rates by age group At-risk-of-poverty rates by decile

28. Simulation Differences within centiles (scenarios 2-1 and 3-1)

29. Simulation Cost of the reform: comparison with other programs

30. Simulation Gainers by income decile

31. Simulation

32. Simulation Mean income by deciles within the three scenarios

33. Conclusions • Aims: • Simulatean IWB in Spainforworkingmothers and seeiftheirincomeincreases as well as theirhoursoffered (behaviouralmodel) • Analysetheredistributiveeffectsonincomedistribution • Results: • Number of hoursofferedincreases (extensivemargin 0-20, 0-40) • Inequality reduces • Reduction of povertyrates • Youngestwomen and coupleswithchildren are particularlybetter off

34. Conclusions • Implicationsforthepolicymaker: • IWBsrepresent a feasibleoptionforthosecountrieswithlesstradition of in-worksupport • Thecostisreasonablecomparedtootherprogramsaimed at low-incomehouseholds • Warnings: • Relativelysmallsample • Needtofind more robustspecificationfortheutilityfunction • Transition 40-20, 40-0 higherthanexpected – checkunobservedheterogeneitywithintheutilityfunction

35. Thank you for attending this session. Comments are welcome ! milagros.paniagua@ief.minhap.es