Men and Women at Work - Gains from Individual Taxation and the Macroeconomic Importance of Workforce Diversity

Policy changes that aim to increase the female labor supply, such as moving from joint to individual taxation of married couples, are high on the agenda of policymakers and widely discussed among economists. Much of the macroeconomic analysis has focused on the direct effects of adding more (female) workers to the labor force by assuming that men and women are perfect substitutes in the production process. I develop a general equilibrium model with heterogeneous agents and family labor supply to characterize the quantitative importance of relaxing this assumption. This is disciplined by my estimate of the elasticity of substitution between male and female labor inputs for modern-day Germany of 0.71. For identification, I exploit a natural experiment that induced exogenous time and county-level variation in the availability of public childcare. In my model, I study the implications of a reform that moves to individual taxation and find that it substantially affects the labor force participation of married women (+12.6%) and overall output (+6.8%). This result compares to an output increase of 3.3% in the perfect substitutability case. Differences in demand responses for male labor inputs drive this effect. Thus, disregarding the added benefits of gender diversity underestimates the positive effects of such a policy change.