The effects of in-work benefit reform in Britain on couples: theory and evidence

Abstract

This article develops a simple model of household decisions that explicitly accounts for the role played by the Working Families' Tax Credit (WFTC) to examine its effects on couples in Britain. The main implications of the model are tested using panel data from the British Household Panel Survey collected between 1991 and 2002. Overall, the financial incentives of the reform had small and statistically insignificant effects on a wide range of married mothers' decisions. Women's responses, however, were highly heterogeneous, depending on their partners' labour supply and earnings.