Taxation and female labor supply in Italy

2.1 2.1 Empirical evidence

There are large cross-country differences in the gender gap, which is about 9 percent on average, and 13 percent for Spain. Italy stands out for a gender employment gap of almost 20 percentage points and for one of the lowest employment rates of women, which is about 16 percentage points lower than the average and 9 percentage points lower than Spain⁵.

There are also gender gaps in the intensity of employment participation. In almost all of the countries, a much larger share of female employment is part-time when compared to male employment, with an average of 12 percent for women and only 2 percent for men. While both full- and part-time employment rates of Italian men are in line with the European average, the full-time rate of Italian women seems to depress their total rate. The importance of part-time employment for women has been at the center of numerous debates among academic economists and policy makers. In 2003, the Italian government approved a law that aimed to increase the flexibility of the existing part-time legislation, having only a limited impact on the difference in part-time employment with other countries⁶.

The marital status considerably affects the decision to participate, with married women having a participation rate that is 10 percentage points lower than unmarried women. This gap is particulary strong in Italy, where it reaches about 15 percentage points. Moreover, participation rates tend to be lower for mothers. On average, 75 percent of married mothers are in the labor force, but only 59 percent in Italy.

Another important feature of the Italian labor market can be observed in Figure 1, where we can see that the labor force participation of married women is positively correlated to their husbands’ yearly income. More specifically, the participation rate is below 55 percent for husband’s yearly gross labor earnings lower than 20,000 euros (second percentile); it increases up to about 70 percent at husbands’ earnings of 30,000 euros (sixth percentile) to remain at that same level in correspondence of the highest percentiles of income.

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This is in contrast with the other countries, including Spain, where the labor force participation appears to be inelastic. To the best of our knowledge these characteristics of the Italian labor force participation of married women has not been explored in the literature, and it is one of the facts that strongly motivated our project. In particular, we argue that the Italian taxation system provides a system of disincentives that makes low-income households choose to remain out of the labor force in order to receive tax credits and cash transfers.

where P r(Y=1|X) denotes the conditional probability of participating in the labor market, Φ is the cumulative distribution function of a standard normal distribution, and the vector of parameters β is estimated by maximum likelihood⁸.

The signs of the marginal effects on the usual demographic variables are consistent across countries. While the data for the EU and Spain satisfy the standard income pooling hypothesis, showing a negative correlation between husband’s earnings and labor force participation, Italy behaves differently. That is, a significant positive marginal effect of 0.021 characterizes Italian data, versus a negative coefficient of 0.020 for the average of the countries, or 0.039 for Spain. These numbers imply that a 1 percent increase in husband’s earnings decreases the probability of participating in the labor force by 3.9 percent in Spain, but it increases it by 2.1 percent in Italy. Such results are particularly surprising because we would expect household income pooling to discourage women from participating in the labor market, especially for those married to high income husbands. Interestingly, this anomaly is not observed for the non-labor household income, which negatively impacts the probability to participate in all countries⁹.

In summary, the Italian labor market exhibits distinctive features. There is a disparity between men and women in the participation rate, mainly regarding married couples. Moreover, once employed, Italian women are much less likely to have a full-time jobs than in other European countries. In what follows, we bridge these facts to the Italian tax system.

2.2 2.2 The Italian tax system

In this section, we describe the main characteristics of the Italian taxation system. More technical details can be found in Additional file 1: Appendix A.

We define the second earner of a household as the worker with the second highest income in the family¹⁰. Generally, in a married couple, the husband is considered to be the first earner who participates in the labor market with certainty. The wife is the second earner. Her decision to participate depends on several economic and non economic variables¹¹. In particular, it depends on the fraction of her expected gross income that will be disposable, net of total taxes. To understand the impact of taxes on the decision to work, we make use of the concept of the second earner tax rate, a tax rate on labor force participation, as in Eissa et al. (2005).

These examples show that the amount of tax credits decreases with the total household income, and it is zero for incomes higher than 95,000 euros a year. The universal cash transfers for children put a similar mechanism at work in married households. On the contrary, they have the positive effect of reducing the fiscal burden of unmarried mothers and create positive incentives to their participation rate (as in example (1)).

Figure 2 plots the SET on earnings of women for different levels of gross yearly earnings. The figures in the left column plot the SET against women’s gross yearly earnings at a given level of husbands’ gross yearly earnings of 19,000 euros. The figures in the right column plot the SET on earnings against husbands’ gross yearly earnings at a level of women’s gross yearly earnings of 11,000 euros¹³. The top panel is for women without children, and the bottom panel is for women with two dependent children.

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In panel a), we can see that the married-unmarried difference in SET is particularly relevant for low women’s earnings (less than 4,000 euros) and dies down as the income increases. The pick of the SET of married women occurs in correspondence with yearly earnings of about 3,500 euros. At that point, husbands are not entitled to receive a tax credit for dependent spouses, and the SET jumps from 9 to about 30 percent. These couples face a trade-off between having the wife participating in the labor market earning a very low salary and not receiving tax credits (but still increasing the total household income) versus not participating and paying lower taxes (because of the tax credits).

In panel b), the SET of married women is constant and equal to the one of unmarried women until a level of husband’s income of about 8,000 euros. In the interval [ 0,8,000] euros, the husband’s income belongs to the no-tax area, and only his wife’s earnings are subject to taxation. After that point, both incomes are taxed and the SET increases to about 20 percent. It is worth noting that the SET remains high for medium levels of household incomes to decrease and reach the second earner tax rate of unmarried women for husbands’ earnings in the highest percentiles.

In panel c) and d), we plot the SET of households with children. We can see that (low earnings) unmarried mothers are subject to negative taxation, as they are eligible for universal cash transfers for dependent children which are higher than the amount of taxes that they are supposed to pay. Married mothers are subject to a higher SET because of the (lower) amount of universal cash transfers for dependent children agreed to the husband. The SET reaches a peak of 40 percent for wife’s earnings of about 3,200 euros. As in panel a), the difference between the tax paid by married and unmarried women decreases with their earnings. In panel d), we can see more clearly the impact of the universal cash transfers for dependent children. The SET of married mothers is increasing up to yearly gross husband’s earnings of about 19,000 euros. After that point, the decreasing cash transfers for dependent children and spouses diminish the difference between taxes to pay if working or not working.

Now, we take a closer look at the impact of taxes by marital status in Figure 3. In panel a), we observe that unmarried women with children have a SET which is much lower than that of unmarried women without children, as the former receive cash transfers for the dependent children. On the contrary, for married women (panel b)), the presence of children negatively affects the SET. Comparing the levels of SET between married and unmarried women by presence of children, we observe that the difference is significatively positive for low-income mothers whose husbands are entitled to receive tax credits and transfers. But it is very close to zero for higher incomes and, in general, for childless women.

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In summary, the Italian tax system, even if based on individuals and not on households, generates a set of negative incentives to female labor force participation. This is due to universal cash transfers and tax credits for dependent children and spouses that increase the second earner tax rate of married relative to unmarried women. The distortion is increasing with the number of children and reaches a maximum at a level of husband’s gross yearly earnings of about 8,000 euros for childless couples and 19,000 euros for couples with children.

2.3 2.3 Theoretical model

We outline a simple static labor supply model to show how some characteristics of the Italian taxation system might relate to the unusual negative correlation between labor force participation of married women and their husbands’ income discussed above. The complete and more complex empirical model will be derived in the next section.

We consider the discrete choice problem of a woman who, upon receiving a job offer, must decide whether to work at wage w _f ¹⁴. We assume that her utility is separable in household income and leisure. Following the previous notation, we distinguish between T(w), the gross tax schedule based on individual labor income w, and F(w _m ,w _f ), the transfers granted to employed workers based on total household income, such as tax allowances for dependent spouses and cash transfers for dependent children. We assume that T ^′>0,T ^″≥0,F ^′<0 and F ^″<0. These assumptions are justified by the fact that fiscal systems are typically progressive, i.e., the marginal tax rate is increasing in income and the tax credit is granted only to families with an income below a given threshold.

By comparing (4) and (5), we observe that married women face a higher second earner tax: it includes not only the gross tax T(w _f ) but also the potential drop in transfers granted to her husband F(w _m ,0)−F(w _m ,w _f ). Moreover, such an effect is larger for a low-income worker’s spouse: since F ^″<0, and the additional implicit taxation F(w _m ,0)−F(w _m ,w _f ) is decreasing in w _m . Intuitively, a rich husband will not benefit from any transfer, no matter what the employment status of his wife is.

3.1 3.1 The models and the empirical specifications

Our policy evaluation methodology relies on a static microeconometric labor supply model. We extend the simple theoretical framework presented in the previous section in order to encompass workers’ and jobs’ heterogeneity and include labor market participation choice¹⁵. The key feature of our modeling framework is the exact representation of tax and transfer schemes when estimating the model.

It is important to underline that we will report several simulation results in relation with the marital status of the agents. That is: (i) the implied choices of unmarried men and women, separately estimated; and (ii) the simultaneous choices of spouses. For case (ii), we will show the differences in the elasticities of women’s probability of participation both when husband’s participation choice is taken as given (as in (Kleven et al. 2009)) and when it is endogenous. Note that in the case of inelastic husband’s labor supply, women solve a similar problem to that of unmarried women, where husband’s employment status and earnings are taken into account.

We build a two-stage static model of labor supply. Consider a one-person decision problem¹⁶. In the first stage, an agent decides whether to join the labor market and search for a job. If she does, she enters the second stage and receives, for each possible amount of working time h∈H⊂ℜ⁺, a job offer characterized by a level of gross yearly earnings w(h). She can accept one of them or reject them all and stay unemployed (h=0). The problem is discretized in the sense that the choice of hours is supposed to be made between few alternatives: part-time, full-time, or unemployment. The idea is simply that there generally are commonly agreed durations of work in the labor market, including the possibility not to work at all. This is relatively realistic and particularly appropriate in the case of Italy where social and institutional norms as well as demand-side rigidities are strong and imply concentrations around a limited number of hour choices. Thus, when modeling unmarried individuals or inelastic husband’s labor supply, the set of alternatives (h=1,…,H) corresponds to H work durations. In the case of joint spouses’ choices, participation and employment decisions are taken simultaneously by the two partners, and there will be H ² combinations of spouses’ labor supplies.

where j={f,m}. w _f and w _m are the labor earnings of women and men, respectively; y is net household non-labor income; F ⁱ (w _m ,w _f ) denotes transfers from the government; and T(w) are taxes on gross earnings. In the rest of the section, the spousal gross wage w _m (h _m ) is taken as given if husband’s labor supply is inelastic.

Notice that the effect of all variables included in Z varies with h ¹⁷. In the case of inelastic husband’s labor supply, the set of explanatory variables Z contains controls for the labor market status of the husband. The difference (α _h −α ₀)+(γ _h −γ ₀)Z ⁱ captures the disutility of working (utility of leisure) an amount of time h. Finally, ε ⁱ is a stochastic error component¹⁸.

The expressions for V ⁱ (w _f (h _f ),0,y,Z) and V ⁱ (0,w _m (h _m ),y,Z) are straightforward analogues of equation (8). In this stage, a household i faces a trade-off between the utility from non working (enjoying leisure and carrying out domestic work) and working, augmenting the disposable income of the household.

and two additional problems similar to (10) for V ⁱ (w _f (h _f ),0,y,Z) and V ⁱ (0,w _m (h _m ),y,Z).

where s indicates the labor market status.

3.2 3.2 The data and wage imputation

We use micro data from the EU-SILC, the Community Statistics on Income and Living Conditions. The survey collects information relating to a broad range of issues in relation to income and living conditions. SILC is conducted by the Statistics Offices of the European countries involved in the project on an annual basis in order to monitor changes in income and living conditions over time.

Every person aged 16 years and over in a household is required to participate in the survey. Two different types of questions are asked in the household survey: household questions, and personal questions. The former covers details of accommodation and facilities together with regular household expenses (mortgage repayments, etc.). This information is supplied by the head of the household. The latter covers details on variables such as work, income, and health and are obtained from every household member aged 16 years and over. We combine household and personal information to construct a data set which contains information on the spouse of the interviewed household member.

We focus on the cross-sectional information of the years 2007-2011¹⁹. We restrict the sample to women aged 26-54 years to avoid the modeling of schooling and retirement decisions. Moreover, we exclude self-employed men and women and individuals that are coded as disabled or unfitted to work. Descriptive statistics are in Table 13, Additional file 1: Appendix B.

The data set provides information on gross labor income of all members of the household (w _m ,w _f ), and total household income. By difference, it is possible to compute the non-labor income y. Nevertheless, it is necessary to compute the potential income for all possible labor supply choices h∈H, including the non-employed. To correct for selection bias, a two-stage non-linear procedure is adopted which departs in few features from the standard Heckman correction.

Since only one category j is observed for each individual and the observations are independent, the correlations between ν _ij and ν _ik for j≠k cannot be identified, so we do not model or estimate them.

where j=z _i . Using E[w _i |z _i ,t _i ,x _i ]=β j′x _i +ρ _j σ _j λ _i , we can consistently estimate β _j with OLS regressions of w on x and \(\hat {\lambda }\) by using only the observations i for which z _i =j ²⁰.

3.3 3.3 Estimation results

To assess the properties of the model, we first examine its ability to reproduce the basic features of labor force participation and employment observed in our sample by comparing model simulations to observed data.

Figure 4 plots the realized and predicted labor force participation rates of married women by percentile of husbands’ incomes. The model with inelastic husband’s labor supply slightly underestimates the participation rates of women married to husbands in the lowest percentile and overestimates the participation of higher income wives. The model with joint decisions delivers a more precise match.

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A similar trend for married women is confirmed in panel (a) of Figure 5, where the realized and predicted participation rates are plotted against the household’s disposable income. In panel (b) of the same figure, we plot the participation rates of husbands, showing that it is inelastic to the household’s disposable income. Interestingly, a similar trend is obtained if participation rates are plotted against wife’s income (red lines).

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As a final validation exercise, we plot the estimated participation rates by age and marital status in Figure 6. We can observe that both models generate the levels and the decreasing trend of the participation rate of the different subgroups of women. Even though the taxation system is not age-dependent, the age of women is correlated with their own potential earnings, their husband’s earnings, and the number of children. As we described above, all of these elements affect the tax burden, and hence, the labor decision of second earners²¹.

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3.4 3.4 Uncompensated labor supply elasticities

The parameter estimates of our models do not directly reveal the sensitivity of labor supply to financial incentives. Hence, in this section, we provide labor supply elasticities for several subgroups of the sample. Uncompensated elasticities for both spouses’ wage rates are relevant to analyze because they are the main driving force behind the tax policy effects.

The own wage elasticity of married men is numerically smaller than the wage elasticities of married women, in accordance with the findings in labor supply studies. In the rest of the table, we illustrate the variation of the labor supply elasticities with disposable household income, geographical area of residence, and presence of children.

The own wage elasticities of married men are decreasing with household disposable income, while the opposite is true for married women (in both models). This is in line with the system of negative incentives provided to wives living in low-income households.

The cross wage elasticity of married women (in the joint decision model) is negative and increasing in household disposable income. By contrast, the cross wage elasticity of married men is positive and increasing in household disposable income. It is estimated to be 0.134, on average, for men (about a fourth of the corresponding own wage elasticity) and -0.055 for women. This means that a 10 percent increase in spousal wage causes a 1.34 percent increase in husband’s participation rate and a 0.55 percent decrease in wife’s participation rate. Hence, changes in wage differences in the family may lead to within-household divergence in participation.

An important feature distinguishes the joint decision model from the model with inelastic husband’s labor supply: In the latter, the cross wage elasticity of wives is positive for all levels of household income. This suggests that assuming a perfectly inelastic labor supply of husbands may deliver an inaccurate analysis of spousal responses to wage increases.

Single women have an own wage elasticity which is lower than the elasticity of men. In general, unmarried agents have an elasticity which is increasing with household’s disposable income.

Geographically, own wage elasticity is increasing from north to south for all but married women. The opposite is true for the cross wage elasticity, which numerically decreases for both husbands and wives. Lastly, households with children are more sensitive to changes in own wages, regardless of the marital status.

4.1 4.1 Three simulated reforms

Let us summarize the main characteristics of the three alternative taxation systems.

Joint family taxation: It is currently implemented in Portugal, France and Germany. It provides tax advantages to large families with low-incomes as the average tax rate decreases with the number of household components. As shown by some existing literature, this system creates a system of negative incentives to participation for both of the spouses, and especially for women²³.

We simulate a taxation system similar to the one we find in France, where the gross income is the household income divided by the number of parts (the quotient familial, a coefficients which increases with the number of household components). Let w _m and w _f be the gross yearly incomes of the two spouses, q be quotient familial, and T(·) be the tax schedule. Then, the amount of tax is equal to q T((w _m +w _f )/q) instead of T(w _m )+T(w _f ). In the simulation, we drop all tax credits for dependent spouses and universal cash transfers. The quotient familial is assumed to equal the number of household components.

Working tax credit: The American Earned Income Tax Credit (EITC) and the British Working Tax Credit (WTC) are two systems of negative taxation. The tax unit is the individual. Based on these systems, households where both of the spouses are employed have the right to receive a tax credit which is increasing with the size of the family and which can even become a transfer²⁴. Chote et al. (2007) provide evidence of an increase from 45 to 55 percent in employment rates of unmarried mothers in Great Britain. Eissa and Liebman (1996) and Ellwood (2000) obtain similar results for the EITC.

We assume that individual working tax credits amount to 1,840 euros, regardless of the individual or household income. Moreover, we eliminate the tax credits for dependent spouses, and we set the universal cash transfers to 137 euros a month for the first child and 121 euros a month for the following children, regardless of the total household income²⁵. This proposition is in line with the tax system of several European countries, and with the suggestions of Atkinson (2011) and Levy et al. (2007).

Gender-based taxation: Alesina et al. (2011) suggest a gender-based taxation system which implies a lower tax schedule for individuals characterized by a participation rate elastic to income. In other words, they propose a lower tax rate for women than for men, regardless of the marital status. They show that this results in a higher participation rate of women. Moreover, the increase in wives’ bargaining power, due to an increase in their net disposable income, affects the division of labor inside the household in their favor. Nevertheless, the gender-based taxation favors high income women and penalizes low-income men. Furthermore, it would imply an equal treatment of two single parent families identical in income but different in the gender of the parents. Saint-Paul (2007) underlines that there is no reason to believe that the participation rate of women is always more elastic than that of men. For example, single women, with and without children, do not behave differently than men. Alternatively, Saint-Paul (2007) suggests to apply a lower tax rate to supplemental hours worked, regardless of the gender.

In the simulation, we apply the same tax rates for men and women, but women only pay 67 percent of their total tax net of standard tax credits, as suggested by Alesina et al. (2011).

4.2 4.2 Results of the simulated reforms

In the joint family taxation scenario, participation rates do not show important changes if husbands and wives decide jointly whether or not to work. On the contrary, labor force participation of married mothers falls by more than 3 percent if the husbands’ labor supply is inelastic. In Figure 7, which shows the participation rates by level of education, we can see that when the labor supply of husbands is exogenously given, low educated mothers leave the labor market at a higher rate than those with college degrees. Employment rates drop for unmarried individuals, while married women exit part-time to enter full-time employment²⁷. As shown in Figure 8, Additional file 1: Appendix D, the SET of married women increases in husband’s income (panels b) and d)) exhibits higher values than the benchmark model (panels a) and c)), implying a decreasing labor force participation in husband’s income. The reason is that without tax credits and universal cash transfers, the SET is now equal to q[T((w _m +w _f )/q)− T(w _m /q)]/w _f , which is positive for every w _m ≥w _f and increasing in the difference (w _m −w _f ).

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But then what are the reasons for the high (and inelastic) labor force participation rate of French women? Despite the disincentives created by the quotient familial, the French government provides a wide range of allowances, tax deductions, and reductions in social security contributions to families with children. For example, an allowance of 50 percent up to a maximum of 2,300 euros per child under seven years of age is granted towards the costs of childcare outside of the home. Moreover, a tax allowance of 50 percent is credited against the costs of assistance with domestic duties, which include childcare. To these fiscal measures, we should add the widespread system of day-care centers (individual and collective) for children both younger and older than three years of age,; monetary transfers to parents who decide to exit the labor market to take care of the children,; and a system of primary schools that offers overtime assistance to children with parents at work²⁸. This set of services (other than fiscal) provide incentives to low-income French mothers to enter (or to remain) into labor force participation. In Italy, the disincentives created by the fiscal system are not offset by any other family policy aimed to reduce the burden of the child care cost.

The Working Tax Credit provides incentives to married women who increase their participation rate up to 3 percentage points. Contrary to the Italian system, the working tax credit has all of the characteristics of an individual taxation system. In fact, tax credits or transfers (and hence, second earner tax rates) do not depend on the spouse’s income and hence do not vary with the marital status. This is shown in Figure 9, Additional file 1: Appendix D, panels b) and d), where the SET is constant at about 20 percent for married women. Similarly, panels a) and c) show that the SET changes only with women’s income. Another interesting feature of this system is that it provides incentives to undertake low earnings jobs. As we can see in Figure 9 (panels a) and c)), the SET is particularly low (and even negative) at low levels of earnings. This prediction can also be seen from Figure 7, bottom panel, where the raise in labor supply mostly comes from low educated mothers. The model forecasts a raise in part-time employment rates of married men and women of about 2 percentage points. Unmarried individuals do not benefit from the simulated tax system.

Finally, the lower taxation of the Gender-Based system boosts the participation and the full-time employment rate of all women, especially if they have children. In particular, it increases participation by about 1 percent and the full-time employment rate by about 7 percentage points. From Figure 10, Additional file 1: Appendix D, we can see that this system leads to a decrease in the SET of every woman, even though it maintains a relatively high SET of low-income married women (as we did not change the system of tax credits and universal cash transfers). However, the tax credits for dependent spouses and cash transfers continue to generate the positive correlation between labor force participation and husband’s income.

Tables 17, 18 and 19 in Additional file 1: Appendix C show the transition flows by education level, number of children, and household disposable income of married women with endogenous husband’s participation decision.