Nonparametric Estimation of the Impact of Taxes on Female Labor Supply
61 Pages Posted: 30 Jul 2004
Date Written: June 2006
Econometric models with nonlinear budgets sets frequently arise in the study of impact of taxation on labor supply. Blomquist and Newey (2002) have suggested a nonparametric method to estimate the uncompensated wage and income effects when the budget set is nonlinear. This paper extends their nonparametric estimation method to censored dependent variables. The modified method is applied to estimate female wage and income elasticities using the 1985 and 1989 waves of PSID exploiting the drastic change in the complete budget set caused by TRA 1986 as a source of identification. I find evidence of downward bias in estimated elasticities if the nonlinearity in the budget set is ignored. The estimated wage elasticities range from 0.6-0.74 for total hours and from 0.26-0.29 on the intensive margin. The income elasticity estimates range from -0.4 to -0.67 overall and from -0.12 to -0.15 on the intensive margin.
Keywords: Taxes and Female Labor supply, Kinked Budget Set, Nonparametric Estimation
JEL Classification: J22, H24, C14, C24
Suggested Citation: Suggested Citation