Taxes and Time Allocation: Evidence from Single Women and Men

The classic model of Becker (1965, “A Theory of the Allocation of Time”, Economic Journal, 125, 493–517) suggests that labour supply decisions should be analysed within the broader context of time allocation and market good consumption choices, but most empirical work on policy has focused exclusively on measuring impacts on market work. This paper examines how income taxes affect time allocation during the entire day and how these time allocation decisions interact with expenditure patterns. Using the Panel Study of Income Dynamics from 1975 to 2004, we analyse the response of single women's housework, labour supply, and other time to variation in tax and transfer schedules across income levels, number of children, states, and time. We find that when the economic reward to participating in the labour force increases, market work increases and housework decreases, with the decrease in housework accounting for approximately two-thirds of the increase in market work. Analysis of repeated cross sections of time diary data from 1975 to 2004 shows that “home production” decreases substantially when market hours of work increase in response to policy changes. Data on expenditures show some evidence that expenditures on market goods likely to substitute for housework increase in response to a greater incentive to join the labour force. The baseline estimates imply that the elasticity of substitution between consumption of home and market goods is 2·61. The results are consistent with the Becker model. Meanwhile, single men show little response to changes in tax policy, and we are able to rule out an elasticity of substitution between home and market goods for this group of more than 1·66.