The growing microsimulation literature suggests that effective tax rates on women are ineffeciently high in many countries. However, there is no consensus in the economic literature about the female labor supply consequences of these high effective tax rates. This study uses a tax – benefit microsimulation model EUROMOD to estimate the effect of tax and transfer policies on the female labor supply. A main contribution lies predominantly in the rich structure of the data, which cover the EU-27 countries for 2005-2009.
Moreover, this study uses a novel way to deal with the endogeneity of taxes and benefits at the individual level. I create a group-level instrumental variable based on a fixed sample of women drawn from the whole EU that serves as a behaviorally-neutral measure of work incentives. Results of the instrumental variable estimation suggest that a 10 percentage point increase in the participation tax rate decreases female employment probability by 2 percentage points. The effect is higher for more educated women and differs substantially across countries.