Behavioral microsimulation of the impact of in-work benefits on female labor supply and income distribution: evidence from Spain

Summary

In-work benefits (IWBs) have become very common transfer programs that seek to meet both
efficiency and equity targets. An expanding literature has assessed the effects of these policies
on income distribution and labor supply. In this paper, we estimate the distributional and
behavioral impacts of a simulated IWB in Spain based on the replacement of the existing
working mother tax credit (WMTC). The US Earned Income Tax Credit (EITC) is used as a
reference. We simulate the effects of the proposed scheme using EUROMOD and a discrete
choice model of labor supply. Our results show that the enhancement of the proposed IWB
would have significant and positive effects both in terms of female labor participation and
inequality and poverty reduction.