Tax Reform, Subsidies, and Labor Supply: Lessons from Türkiye

Despite recent progress, Türkiye’s low labor force participation (LFP) rate is macrocritical and stands out internationally. This paper examines two channels through which fiscal policy can affect LFP. First, we estimate the impact of Türkiye’s 2022 Minimum Living Allowance reform, which removed tax disadvantages faced by secondary earners. Second, we simulate the impact of conditional subsidies on Türkiye’s LFP. The analysis was based on four empirical models estimated for Türkiye using labor force survey micro data. The results confirmed that: (i) Turkish secondary earners increased their labor supply by more than primary earners following the removal of tax disadvantages in the 2022 reform; (ii) conditional childcare subsidies lead to a large increase in LFP at relatively low fiscal costs; (iii) conditional subsidies can achieve better labor market outcomes and further reduce fiscal costs compared to direct transfers.