Labour Force Participation and Tax-Benefit Systems: A Cross-Country Comparative Perspective

Kamil Galuščák, Gábor Kátay

This paper investigates the extent to which cross-country differences in aggregate participation rates can be explained by divergence in tax-benefit systems. We take the example of two countries, the Czech Republic and Hungary, which – despite a lot of similarities – differ markedly in labour force participation rates. We first replicate for Czech household-level data the labour supply estimation for Hungary presented in Benczúr et al. (2014) and use the two perfectly comparable estimates to simulate how the aggregate participation rate would change in one country if the other country’s tax and social welfare system were adopted. Our estimation results yield similar labour supply elasticities for both countries, suggesting that individual preferences are essentially identical. The simulation results show that about one-half of the total difference in the participation rates of the 15–74 years old population can be explained by differences in the tax-benefit systems. The highest response is obtained for married women or women of childbearing age. This is related to the more generous maternity benefit system in place in Hungary as compared to the Czech Republic.

JEL codes: C63, H24, I38, J22, P50

Keywords: Cross-country comparison, labour supply, microsimulation, participation rate, tax-benefit systems

Issued: December 2014

Download: CNB WP 10/2014 (pdf, 1 MB)