A structural approach to estimating the effect of taxation on the labour market dynamics of older workers

We estimate a dynamic structural life-cycle model of employment, non-employment and retirement that includes endogenous accumulation of human capital and intertemporal non-separabilities in preferences. In addition, the model accounts for the effects of income tax, social security contributions and the transfer system on work incentives. The structural parameter estimates are used to evaluate the employment effects of a tax reform focused on low-income individuals. This tax reform is found to cause a significant increase in employment and we find evidence for anticipation effects if the reform is targeted only at older workers. Copyright (C) 2010 The Author(s). The Econometrics Journal (C) 2010 Royal Economic Society