Question

b. Explain the following “The predicted increase in work incentives associated with supply-side tax cuts might in fact be more relevant for women than for men.” How would this be reflected in men’s and women’s labor supply curves? Include the graphs.

Answer 1

Since women are more involved in housework and child care across societies, their opportunity cost of working outside home is far greater than for men. The response of the amount of labour supply to wage increases (or tax cuts) depends on both income and substitution effect.  While the income effect leads to increase in amount of labour supplied with increase in wage, the substitution effect induces substituting labour with alternative activities or leisure. In case of women, the substitution effect is stronger than the income effect because at higher wages they would have to work less to earn the same and use the additional time for household chores. Therefore, women's supply curve is backward bending unlike the consistently upward sloping curve for men. Therefore, the tax cuts give incentives to women to work less and give more time to household activities while for men the tax cut may not be so relevant for men as they will continue working the same hours as their income and substitution effects balance out. The supply curve for women and men are shown in figure (a) and figure (b).

b