The Impact of income taxation on the labor supply of part-time and full-time workers

This paper estimates the effect of income taxation on the labor supply of part-time and full-time workers in the United States. Using a model that incorporates the endogeneity of the net wage rate and the virtual income, and correcting for self-selection into part-time and full-time jobs, the results indicate that part-time workers are relatively more responsive to changes in income tax than full-time workers. Estimated wage elasticities are relatively larger for part-time than for full-time workers. The simulation results indicate that income tax has a disincentive effect on both part-time and full-time workers, with part-time and full-time workers reducing their labor supply by 0.87 and 0.58 hours, respectively, if a 5% tax is imposed. However, the percentage reduction in hours of work is very small, and a tax policy may have little effect on the labor supply of workers. The results seem to suggest that female and black part-time workers are more likely to drop out of the labor force at higher levels of income tax. It also tests the hypothesis that the labor supply behavior of part-time and full-time workers differs. The test results indicate that the determinants of the labor supply of part-time workers are different from those of full-time workers. It is noted that there is a significant difference between the labor supply of male part-time and female part-time workers, as well as between the black part-time and white part-time workers. In order to reduce voluntary unemployment in market activities among married females and blacks, the government can encourage part-time work by sponsoring legislation or instituting a scheme that will allow part-time workers to pay relatively less in payroll taxes.