Social Policy Research Unit financial incentives and mother’s employment: a comparative perspective
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- Percentage of ILO unemployed % over 16 % of females over 16
- After taxes and benefits After taxes, benefits, housing costs and services
- Two earners ave. male+half ave. female to ave. male and ave. female One on half male ave. to male ave earnings
- 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
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
.. = 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.
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.
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
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). Download 456 Kb. Share with your friends:
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