The Effects of the 1.03 million yen Ceiling in a Dynamic Labor Supply Model

In this paper I examine the e ects of a means-tested transfer system in Japan (“1.03 million yen ceiling”) in a dynamic labor supply model with endogenous retirement. In Japan, married women have reason to limit their annual earnings to no more than 1.03 million yen in order to receive a number of benefits available to low-income wives, and in fact often choose to do so. In a dynamic model, the optimal labor supply schedule follows a pattern that is not seen in a static framework, which I call the “spillover e ect.” The paper also examines the properties of dynamic welfare cost of this ceiling.