Does the Extension of Spousal Allowances Coverage Encourage Hourly Female Employees to Work More?

The spousal allowances (SAs) in Japan’s tax system enable women to keep their annual income under certain thresholds to make their husbands eligible for income tax exemption. The coverage of the SAs was extended in 2017 to encourage women to work more. This study estimated the impact of the coverage extension of the SAs in 2017 on the female labor supply using a difference-in-differences model with fixed effects. Moreover, an improved propensity scores matching method and two traditional methods were used to diminish the self-selection bias. It was demonstrated that the 2017 tax reform exerted favorable effects on the female labor supply under an unchanged wage assumption. However, robust significant effects would not be evidenced if the assumption was excluded. These differences suggest that different measures of labor supply hugely impacted the results. Moreover, a theoretical model was built to explain the reform’s effect on the labor supply of married women through the quasi-substitution and quasi-income effects. The changes in female labor supply are attributed to changes in marginal SAs for working hours of the wife, changes in SAs’ full amount, and changes in effective income tax rates for husbands brought about by the reform