The long-term effects of in-work benefits in a lifecycle model for policy evaluation

This paper presents a life-cycle model of woman's labour supply, human capital formation and savings
for the evaluation of welfare-to-work and tax policies. Women's decisions are formalised in a dynamic
and uncertain environment. The model includes a detailed characterisation of the tax system and of
the dynamics of family formation while explicitly considering the determinants of employment and
education decisions: (i) contemporaneous incentives to work, (ii) future consequences for employment
through human capital accumulation and (iii) anticipatory effects on the value of employment and
education. The choice of parameters follows a careful calibration procedure, based of a large sample of
data moments from the British population during the nineties using BHPS data. Many important
features established in the empirical literature are reproduced in the simulation exercises, including
the employment effects of the WFTC reform in the UK.The model is used to gain further insight into
the responses to two recent policy changes, the October 1999 WFTC and the April 2003 WTC/CTC
reforms. We find small but non-negligible anticipation effects on employment and education.