Nonparametric estimation of the impact of taxes on female labor supply

Abstract

This paper proposes a simple extension of nonparametric estimation methods for nonlinear budget-set models derived in Blomquist and Newey (2002) to censored dependent variables. The nonparametric method is applied to estimate female labor supply elasticities using data on married women from the 1985 and 1989 waves of the Panel Study of Income Dynamics, exploiting the substantial variation in budget sets caused by the Tax Reform Act of 1986 as a source of identication. The estimated wage elasticities from this new method are 0.56 overall and 0.27 on the intensive margin. The income elasticity estimates are close to -0.67 overall and -0.13 on the intensive margin. Compared with the linear labor supply model, the estimated elasticities are usually larger for the nonparametric specications that account for nonlinear budget sets. © 2010 John Wiley & Sons, Ltd.