IFS Working Paper W / Female Labor Supply, Human Capital and Welfare Reform

We estimate a dynamic model of employment, human capital accumulation including education, and savings for women in the UK, exploiting tax and benefit reforms, and use it to analyze the e↵ects of welfare policy. We find substantial elasticities for labor supply and particularly for lone mothers. Returns to experience, which are important in determining the longer-term e↵ects of policy, increase with education, but experience mainly accumulates when in full-time employment. Tax credits are welfare improving in the UK and increase lone-mother labor supply, but the employment e↵ects do not extend beyond the period of eligibility. Marginal increases in tax credits improve welfare more than equally costly increases in income support or tax cuts. Acknowledgements: We thank four anonymous referees and the editor for helpful comments. This research has greatly benefited from discussions with Joe Altonji, Mike Brewer, David Card, Jim Heckman, Enrico Moretti, Hamish Low and Corina Mommaerts. We are also grateful to participants at the EEA Summer Meetings, the IZA/SOLE transatlantic meeting, the NBER TAPES conference and seminars at Yale University, the University of Mannheim, IFS, the University of Copenhagen, U. C. Berkeley and the DIW for their comments. This research is funded by the ESRC Centre for the Microeconomic Analysis of Public Policy and the NCRM node Programme Evaluation for Policy Analysis, both at the IFS. Financial support from the ESRC, grant number RES-000-23-1524, is gratefully acknowledged. Costas Meghir thanks the Cowles foundation and he ISPS at Yale and the ESRC under the Professorial Fellowship RES-051-27-0204 for funding. The usual disclaimer applies. ⇤University College London, Institute for Fiscal Studies and IZA. [email protected] †Institute for Fiscal Studies and CEF-UP at the University of Porto. monica [email protected]. ‡Yale University, Institute for Fiscal Studies, IZA and NBER. [email protected] §Institute for Fiscal Studies and University College London. [email protected].