Labor supply responses of Italian women to minimum income policies

Anna Laura Mancini, Collegio Carlo Alberto

Minimum income policies are means-tested policies aimed at guarantee all citizens with a minimum level of income and at fighting social exclusion typically associated with extreme poverty. Their main shortcoming relies on the theoretical disincentive effect on labour market participation they could generate in the bottom part of income distribution, due to the high effective marginal tax rate they impose around the threshold level. This paper employs a structural labor supply model under discrete choices to examine labor supply responses of Italian women to the introduction of a minimum income policy. Different thresholds levels and earnings exemption ratios (exemption of part of labour earnings from relevant family income) have been tested to assess the existence and the magnitude of the disincentive effect. The results show that the level of the eligibility threshold is crucial in determining the existence of a poverty trap mechanism while the earnings exemption mechanism seems not to play any role. Moreover, family structure is crucial: only married women experience a disincentive effect, that tends to vanishes the higher the income threshold, while single women participation rates increase under all possibilities.