Assessing the Impact of Taxes on Female Labor Supply Using a Finite Mixture Approach

This paper expands the standard analysis of female labor supply to permit preference heterogeneity by using a finite mixture model. Using the extended model, we obtain theory consistent results whereas a traditional model produces a negative substitution effect. We use our model to illustrate the labor supply effects of a tax reform, corresponding to 1983-1992 changes in the Swedish income-tax schedule. The results shows an expected reduction in tax revenues of about 17%. Finally, we use Monte Carlo simulations and show that our proposed mixture model is robust towards different misspecifications