The effects of welfare guarantee levels and tax rates on male labour supply

Abstract

The effect of welfare on labour supply is theoretically ambiguous. The effect of implicit welfare tax rates has not been precisely determined in previous studies. The effective welfare guarantee levels and tax rates estimated for each state from 1979 to 1990. Employing these newly estimated welfare descriptive statistics, the labour supply impacts of both welfare guarantee levels and tax rates are determined with high statistical precision for married males with children. A standard labour supply model is estimated by means of a tobit procedure over a multiyear cross–sectional pooled data set derived from the US Census Bureau's Current Population Survey for the period 1979 to 1990. Increases in the welfare guarantee level slightly increase labour supply for married males. An elasticity of 0.04 is computed. Increases in the welfare tax rate on earned income slightly decreases labour supply. An elasticity of −0.07 is computed.