Female Labour Supply, Human Capital and Welfare Reform

COWLES FOUNDATION DISCUSSION PAPER NO. 1892 by Richard Blundell (University College London and Institute for Fiscal Studies), Monica Costa Dias (Institute for Fiscal Studies and CEF-UP at the University of Porto), Costas Meghir (Yale University, Institute for Fiscal Studies and NBER) and Jonathan Shaw (Institute for Fiscal Studies and University College London)

Abstract

We consider the impact of Tax Credits and income support programmes on female education choice, employment, hours and human capital accumulation over the life-cycle. We thus analyse both the short run incentive effects and the longer run implications of such programmes.

By allowing for risk aversion and savings we are also able to quantify the insurance value of alternative programmes. We find important incentive effects on education choice, and labor supply, with single mothers having the most elastic labour supply. Returns to labour market experience are found to be substantial but only for full-time employment, and especially for women with more than basic formal education.

For those with lower education the welfare programmes are shown to have substantial insurance value. Based on the model marginal increases to tax credits are preferred to equally costly increases in income support and to tax cuts, except by those in the highest education group.

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