Social Policy Research Unit financial incentives and mother’s employment: a comparative perspective



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Child under 19 years

Married/ cohabiting mothers Employed

Lone mothers Employed

Australia1 (2000)

58

46

Austria (1999)

58

80

Belgium (1997)

65

59

Canada (1996)

.

51

Denmark (1995)

..

73

Finland2

67 (1996)

65 (1998)

France3 (2001)

67

66

Germany4 (2000)

63

67

Greece (1996)

..

75

Ireland (1999)

42

53

Israel (1999)

46

..

Italy (1998)

..

65

Japan3 (1999)

45

83

Luxembourg (2000)

48

82

Netherlands5 (1997)

45

42

New Zealand (2001)

64

45

Norway (1999)

81

68

Portugal (1996)

59

88

Spain (1991)

..

68

Sweden (1998)

..

68

UK (2001)

68

50

USA6 (2000)

68

68

Italics =obtained from source other than national informant

Mothers with children under 15



2 Lone parents

3 Children under 18

4 All married mothers and all lone mothers

5 Employed = those working 12 hours or more a week

6 Married women only

Source: Bradshaw and Finch 2002
In order to understand the impact of replacement rates on mothers, it is important to look at mothers’ unemployment rates, and to do so in the context of that of the general population. Table 2 shows the unemployment rate for the general population over 16, for the female population over 16, for mothers in couples and for lone mothers. The ILO definition of unemployed3 has been used unless otherwise stated4.
The ILO female unemployment rate is significantly higher than that of the general population in the Southern European countries; Greece, Italy and Spain. Married/cohabiting mothers in the Netherlands and the UK are significantly more likely to be unemployed than females in the general population. This indicates that in these countries mothers find it difficult to find a suitable job, although in the case of the UK, those registered as unemployed are able to work below sixteen hours.
The proportion of unemployed lone mothers ranges from two per cent in Ireland and three per cent in the UK to 19 per cent in France and 20 per cent in Germany. Italy and Spain are the only two countries in our study (and for which data is available) with a lone mother employment rate that is significantly lower than the female unemployment rate. This suggests that in these countries rather than looking for paid work, relatively high proportions of mothers are staying at home to look after children.

Table 2 Percentages of ILO unemployed





Percentage of ILO unemployed

% over 16

% of females

over 16

% of Married/cohabiting mothers

% of lone mothers

Australia1

7

(2001)


7

(2001)


5

(2000)


13

(2000)


Austria (1999)

4

5

6

4

Belgium (2000)

5

5

4

18

Canada

7

(2000)


7

(2000)


8

(1996)


16

(1996)


Denmark (2000)

5

6

..

..

Finland (2000)

9

9

7

18

France (2001)

9

11

10

19

Germany

8

(2000)


9

(2000)


5

(1997)


20

(1997)


Greece (1999)

12

18

..

..

Ireland

4

(2000)


4

(2000)


2

(1999)


2

(1999)


Israel1

9

(1998)


9

(1998)


10

(1999)


..

Italy1

12

(2000)


17

(2000)


..

8

(1998)


Japan2 (2001)

5

5

..

..

Luxembourg

2

(2001)


3

(2001)


3

(2000)


7

(2000)


Netherlands (1999)

4

5

13

7

New Zealand (2001)

5

5

..

..

Norway (1999)

3

3

2

6

Portugal (2000)

4

5

..

..

Spain (2000)

14

21

..

14

Sweden2 (2000)

5

5

..

..

UK

5

(2001)


4

(2001)


8

(2000)


3

(2000)


USA

5

(2001)


5

(2001)


33

(2000)


8

(2000)


.. = data not available

1 Age 15 and over.

2 Not ILO definition.

3 Married mothers only.

Source: Bradshaw and Finch 2002
This chapter studies the financial incentives for maternal employment, drawing on data derived from a recent study of tax and benefit policies in 22 countries (Bradshaw and Finch 2002). The model family method makes it possible to calculate average marginal tax rates and notional replacement rates and thus the financial incentive structures facing families in different countries.
Average marginal tax rates

Average marginal tax rates are estimates of the proportion of extra earnings that would be foregone in extra direct taxes, loss of income related benefits and extra charges. It is an indication of the financial incentives facing a mother. So for example if a mother increased her earnings from half national average earnings to national average earnings what would be the effect on her family’s net disposable income? The marginal tax rates calculated here are average in the sense that they are the average over that range of increased earnings. For any extra £ earned they may be higher or lower. We use the phrase marginal tax rate despite the fact that not all of the impact on net incomes is the result of taxation – it includes extra charges for services and the loss of benefits. Average marginal tax rates are estimated according to the following formula ((100-((earnings A - earnings)/(net income A – net income B)*100)), where B is a lower earnings level than A.
In Table 3 we start by considering the case of a lone mother who moves from half average female earnings to average female earnings by increasing her hours or getting a better job. The average marginal tax rate varies according to whether childcare is involved and whether the estimate is before services and housing costs. We see that there are considerable variations in average marginal tax rates between countries. After taxes, benefits, services and housing costs are taken into account the lone mother has an average marginal tax rate of 142 per cent in Israel when childcare costs are taken into account and 119 per cent if they are not. This means that in Israel this lone mother would be considerably worse off as a result of doubling her earnings. The average marginal tax rates are also very high in the USA, Australia, Ireland, New Zealand and the UK - all countries with a strong element of targeting in their tax benefit packages. In contrast the average marginal tax rate in Luxembourg and Spain is very low. In most countries the average marginal tax rates, after taxes, benefits, housing costs and services, are higher for the lone mother needing childcare – France and Spain are exceptions.
Table 3 Marginal tax rates for a lone parent with one child: percentage of extra earnings foregone in taxes and lost benefits in moving from one earnings level to another.





After taxes and benefits

After taxes, benefits, housing costs and services




Moving from half average female earnings to average female earnings




Plus childcare

No childcare

Plus childcare

No childcare

Australia

59

60

81

77

Austria

31

31

64

57

Belgium

53

57

61

59

Canada

50

44

50

44

Denmark

48

48

74

64

Finland

10

10

72

59

France

23

26

49

52

Germany

47

47

88

57

Greece

15

15

93

39

Ireland

89

89

94

94

Israel

90

90

142

119

Italy

41

43

72

46

Japan

45

45

67

48

Luxembourg

12

14

20

14

Netherlands

30

30

56

56

New Zealand

53

53

86

72

Norway

60

34

62

42

Portugal

27

27

42

27

Spain

13

14

13

15

Sweden

7

7

63

56

UK

69

64

84

76

USA

55

55

95

91

Table 4 takes a couple with two children and first shows the marginal tax rate in one earner moving from half average male earnings to average male earnings as the baseline. Before housing costs and services the average marginal tax rates vary from 13 per cent in Japan and 14 per cent in Spain to 78 per cent in the USA and 59 per cent in Australia. After housing costs and services they increase in most countries. In the USA for this family the marginal tax rate is 130 per cent. Average marginal tax rates are also very high in Sweden, Australia, the Netherlands and Austria and again low in Japan and Spain.


The marginal tax rates on the earnings of a mother starting to work and earning half national average female earnings are also shown in the table. In countries where second earners benefit from a tax relief or allowance the marginal tax rates are lower than in the previous case. The marginal tax rates are very low in Finland, Sweden and Israel, and thus the financial incentives to work longer hours or to increase earnings is relatively high in these countries for this mother. Belgium, Denmark and Germany are countries with high marginal tax rates on second earners, and thus provide low financial incentives in this case. At this level of earnings in most countries we move beyond the scope of housing benefits and income related reductions in charges for services and the after housing and services marginal tax rates do not vary much. Finland and Sweden are exceptions as a result of their local taxation being income related.
Finally the table shows the impact of a mother in a couple doubling her earnings from half average female to average female as a result of working longer hours or earning more for the same hours. After taxes, benefits, housing costs and services the average marginal tax rate varies from 21 per cent in Spain to 58 per cent in Belgium. For most countries there is little difference between the average marginal tax rate before and after housing and services because at this earnings level they are beyond the scope of income related benefits.
Table 4 Marginal tax rates for couple+2 children: percentage of extra earnings foregone in taxes and lost benefits in moving from one earnings level to another.





After taxes and benefits

After taxes, benefits, housing costs and services




One earner on half male ave. to male ave earnings

One earner male ave. to two earners male ave. +female half ave. earnings

Two earners ave. male+half ave. female to ave. male and ave. female

One on half male ave. to male ave earnings

One earner male ave. to two earners male ave. +female half ave. earnings

Two earners ave. male+half ave. female to ave. male and ave. female

Australia

59

23

44

73

23

44

Austria

43

21

35

71

21

35

Belgium

50

44

56

52

47

58

Canada

48

22

26

48

22

26

Denmark

45

50

50

61

54

50

Finland

33

6

22

68

20

39

France

24

30

37

49

33

39

Germany

45

50

53

60

50

53

Greece

18

15

18

45

15

18

Ireland

41

23

25

51

34

25

Israel

40

12

29

40

12

29

Italy

54

38

32

57

40

34

Japan

13

18

27

17

23

29

Luxembourg

31

23

38

39

23

38

Netherlands

41

42

52

77

34

52

New Zealand

50

20

22

63

20

22

Norway

34

29

34

42

29

34

Portugal

28

32

36

46

32

36

Spain

14

26

21

15

26

21

Sweden

37

7

7

71

26

35

UK

56

14

32

63

14

32

USA

78

21

36

129

21

36

Table 5 shows the impact of a mother joining the labour market if childcare is involved by comparing the marginal tax rates between a one earner average earnings couple with no paid childcare and when a mother earns half average female earnings but has to pay for childcare. In all countries except Spain the marginal tax rates are much larger when childcare is involved. There is no benefit in the mother entering employment in Ireland, the Netherlands and the USA if formal childcare needs to be paid for. However the marginal tax rate is relatively low in Sweden, Finland and Austria.


Table 5 Marginal tax rates – impact of a mother in a couple starting work. Impact of childcare after taxes, benefits and services





One earner ave. male earnings to two earners ave. male and half ave. female earnings




Childcare needed

No childcare needed

Australia

64

26

Austria

42

22

Belgium

65

45

Canada

66

24

Denmark

67

51

Finland

26

-1

France

62

35

Germany

80

50

Greece

56

25

Ireland

102

30

Israel

75

17

Italy

61

34

Japan

56

25

Luxembourg

54

26

Netherlands

111

65

New Zealand

87

23

Norway

62

30

Portugal

76

46

Spain

29

29

Sweden

32

6

UK

64

14

USA

142

58

It appears that the countries which are most anxious about the impact of work incentives on labour supply have comparatively high marginal tax rates at the lower end of the earnings distribution. This is because they rely more than other countries on income related benefits and tax credits which are withdrawn as earnings increase. The loss of childcare benefits is a particular cause of high marginal tax rates for lone mothers.


But do marginal tax rates actually influence mothers’ decision to earn more/work longer hours? What evidence is there that these marginal tax rates are associated with variations in labour supply at this macro level? We explore this in the following charts. Chart 1 plots the average marginal tax rate for a standard family against the proportion of married women working. There is a weak positive relationship - the higher the marginal tax rates for mothers working part time, the more married mothers are working. Chart 2 also shows, if anything, a weak positive relationship between marginal tax rates for mothers working full time and the proportion of mothers working full time. These results run counter to expectations derived from economic theory. However there is support for economic theory in Chart 3 where we find there is a weak negative relationship between marginal tax rates and lone mothers working and in Chart 4 where we find there is a weak relationship between marginal tax rates of lone mothers needing childcare and the proportion of lone mothers working full-time (over 30 hours).


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