IMF Working Papers

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

By Silvia Domit, Yomna Gaafar, Duncan MacDonald, Carolina Osorio-Buitron

September 19, 2025

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Format: Chicago

Silvia Domit, Yomna Gaafar, Duncan MacDonald, and Carolina Osorio-Buitron. "Tax Reform, Subsidies, and Labor Supply: Lessons from Türkiye", IMF Working Papers 2025, 187 (2025), accessed September 20, 2025, https://doi.org/10.5089/9798229025591.001

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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.

Subject: Employment, Gender, Income, Labor, Labor force, Labor force participation, Labor supply, National accounts, Women

Keywords: Childcare Subsidies, Employment, Employment, Income, Labor force, Labor force participation, Labor Force Participation, Labor markets, Labor supply, Personal Income Tax, Tax Reform, TaxFit, Türkiye, Women

Publication Details

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