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Taxes and Market Hours: the Role of Gender and Skill DISCUSSION PAPER SERIES IZA DP No. 11002 Taxes and Market Hours: The Role of Gender and Skill Robert Duval-Hernández Lei Fang L. Rachel Ngai SEPTEMBER 2017 DISCUSSION PAPER SERIES IZA DP No. 11002 Taxes and Market Hours: The Role of Gender and Skill Robert Duval-Hernández University of Cyprus, CIDE and IZA Lei Fang Federal Reserve Bank of Atlanta L. Rachel Ngai London School of Economics, CEPR and CfM SEPTEMBER 2017 Any opinions expressed in this paper are those of the author(s) and not those of IZA. Research published in this series may include views on policy, but IZA takes no institutional policy positions. The IZA research network is committed to the IZA Guiding Principles of Research Integrity. The IZA Institute of Labor Economics is an independent economic research institute that conducts research in labor economics and offers evidence-based policy advice on labor market issues. Supported by the Deutsche Post Foundation, IZA runs the world’s largest network of economists, whose research aims to provide answers to the global labor market challenges of our time. Our key objective is to build bridges between academic research, policymakers and society. IZA Discussion Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may be available directly from the author. IZA – Institute of Labor Economics Schaumburg-Lippe-Straße 5–9 Phone: +49-228-3894-0 53113 Bonn, Germany Email: [email protected] www.iza.org IZA DP No. 11002 SEPTEMBER 2017 ABSTRACT Taxes and Market Hours: The Role of Gender and Skill* Cross-country differences of market hours in 17 OECD countries are mainly due to the hours of women, especially low-skilled women. This paper develops a model to account for the gender-skill differences in market hours across countries. The model explains a substantial fraction of the differences in hours by taxes, which reduce market hours in favor of leisure and home production, and by subsidized care, which frees (mostly) women from home care in favor of their market hours. Low-skilled women are more responsive to policy because of their low market returns and their comparative advantage in home activities. JEL Classification: E24, E62, J22 Keywords: cross-country differences in market hours, home production, subsidies on family care Corresponding author: L. Rachel Ngai Department of Economics London School of Economics Houghton Street London WC2A 2AE United Kingdom E-mail: [email protected] * We wish to thank Alessio Moro, Chris Pissarides, Michelle Rendall and Etienne Wasmer, as well as seminar participants at CIDE, ILO, and LSU, and conference participants at Midwest Macro meetings 2016, Econometric Society North America Summer meetings 2016, Conference on European Employment at the University of Cyprus 2016, Conference on Structural Transformation and Macroeconomic Dynamics at the University of Kent 2016, Conference on Growth and Development at Madrid 2017, Asian and China meetings of the Econometric Society 2017, the Society for Economic Dynamics meeting 2017, and Tsinghua Workshop in Macroeconomics 2017 for useful comments. The views in this paper represent those of the authors and are not those of either the Federal Reserve Bank of Atlanta or the Federal Reserve System. We acknowledge financial support from the European Research Council EUROEMP Advanced Grant (#323940) administered by the University of Cyprus. IZA DP No. 11002 SEPTEMBER 2017 NON-TECHNICAL SUMMARY Aggregate hours of market work in broadly similar countries across the OECD vary widely. For example, during the early 2000s, weekly market hours per adult aged 20-64 in the U.S. were about 28 while they ranged from 19 to 25 in a sample of European countries. The majority of these differences are driven by the responses of different demographic groups to different incentives in the labor market. We document that differences in aggregate market hours are mainly due to differences in the hours of women, especially women without a college degree. We also find that market hours in European countries are particularly lower in the service sector. Our paper shows that differences in taxes and social subsidies on family care account for a substantial fraction of the observed cross-country differences in market hours by gender, skill, and economic sector. As taxes increase, households decrease their market hours and devote more time to leisure and home production. The reduction in market hours is especially large in the service sectors producing close substitutes to home services. This shift of hours from market to home is larger for women, since home production is mainly performed by women. Moreover, as low-skilled women have lower wages, and therefore the lowest opportunity cost of not working in the market, the shift of time away from the market is the largest for them. In contrast, social subsidies on family care reduce the price of market services that are close substitutes with the ones produced at home, and thus increase the incentive to marketize home services. This results in more female market hours, especially among the low-skilled. The role played by subsidies helps reconcile the labor supply patterns observed in Nordic countries, where both taxes and subsidies are high, and women have relatively high market hours of work. Our study has implications that go beyond the European context and that concern more generally the types of policies that can be used to promote the participation of women in the market. In particular, our research highlights the key role of policies that reduce the cost of marketizing home production, such as subsidies on family care. This seemingly gender-neutral policy is effectively gender-biased, given women’s greater involvement in housework activities. 1 Introduction Aggregate hours of market work in broadly similar countries across the OECD vary widely. For example, during the early 2000s, weekly market hours per adult aged 20-64 in the U.S. were about 28 while they ranged from 19 to 25 in the European countries in our sample. While some of these differences can be attributed to a different demographic composition across countries along dimensions such as age, marital status, gender, and education, the majority of the differences are driven by responses of different demographic groups to different incentives in the labor market. The objective of this paper is to delve deeper into the cross-country relationship between tax-subsidy and market hours, by paying particular attention to the different responses across gender and skill groups. Using labor force surveys from 17 OECD countries, this paper compares market hours by gender-skill group across countries, controlling for differences in their demographic composition. Empirically, it documents that differences in aggregate market hours are mainly due to differences in the hours of women, especially women without a college degree (hereafter, referred as low-skilled women).1 It also finds that market hours in European countries are particularly lower in the service sector than in the goods sector. It shows that taxes are negatively associated with market hours for each of the gender-skill groups. More importantly, when account is taken for the presence of social subsidies on family care, this negative association becomes even stronger for low-skilled women and for service sectors that produce close substitutes to home services. These empirical findings suggest that gender, skill, and sector of employment are important dimensions for understanding how taxes and subsidies affect cross-country differences in aggregate market hours. Lower market hours could either reflect more time devoted to leisure or to home pro- duction. The main hypothesis of this paper is that taxes and subsidies affect market hours differently across gender-skill groups through two substitution margins: across market and home and across work (market plus home) and leisure. Using harmonized time use data, this paper finds that while the substitution between work and leisure is important in under- standing cross-country differences of market hours for all gender-skill groups, the substitution between market and home is more important for women, especially for low-skilled women.2 Motivated by these empirical findings, we develop a multi-sector model to study the quan- titative effects of taxes and subsidies on market hours through the two substitution margins. 1Fang and McDaniel (2017) also find that differences in cross-country market hours are dominated by the market hours of women. 2Both Freeman and Schettkat (2005) and Burda, Hamermesh and Weil (2013) emphasized the importance of substitution between home and market production in understanding cross-country differences in market hours. 2 The model consists of three market sectors producing goods, non-substitutable services, and substitutable services. Substitutable services and home services are good substitutes, with an elasticity of substitution greater than one, while goods and services are poor substitutes. There are four types of labor inputs, male and female with low or high skill. Production in each sector involves all four types of labor inputs. The representative household allocates time to market work, home production, and leisure for each gender-skill group. The calibrated model implies that differences in taxes and social subsidies on family care can account for a substantial fraction of the observed cross-country differences in market hours by gender, skill, and sector. The combination of preferences and comparative ad- vantages of production factors is critical in producing the model results. In particular, the effects of taxes and subsidies occur through the two substitution margins between work and leisure on the one hand; and market and home work on the other. The first margin is equally important for all population groups, while the second margin is more important for women if they have a comparative advantage in producing services such as adult and child care, both in the market and at home.3 Income and consumption taxes discourage market hours through both substitution mar- gins.
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