Abstract

Japanese spousal tax deduction and social security system cause a piecewise linear and discontinuous budget constraint for a married woman. Using a sample from the Japanese Panel Survey of Consumers, we estimate a labor supply model that simultaneously controls for wage endogeneity, sample selection into labor force as well as the possibly endogenous selection between different segments of the non-linear budget constraint. The effects of tax and social security system on the labor supply behavior of married women are more complex than the previous literature has pointed out. In particular, there are notable differences in the labor supply behavior of women who choose different segments of the budget constraint. The wage elasticity of women in the budget segment I (annual income less than the "1.03 million yen ceiling") is twice more negative (-1.28) than women in the budget segment III (annual income greater than the "1.41 million yen ceiling") (-0.60). The wage elasticity smaller than -1 for the budget segment I suggests that these women may be adjusting their hours of work so as to contain their income within the 1.03 million yen ceiling. Education has a positive effect on the hours of work for the budget segment III, but has no effect for the segment I. Unlike the budget segment III, the positive effect of education on wage is non-existent for the women in the budget segment I, indicating an under-utilization of the human capital of women who have chosen to be dependent on the husbands' income on the tax and social security purposes.