Real and Phantom Constraints: How Japan’s Tax System Shapes Female Labor Supply

This paper shows that tax and social insurance complexity distorts female labor supply in Japan by creating a salient but misleading income threshold. Using administrative data on married women, we document sharp bunching at multiple earnings cutoffs. Strikingly, women respond more strongly to a threshold with little true income effect than to a nearby threshold involving a large discrete loss. We show that this pattern is inconsistent with full-information labor supply and reflects systematic misperceptions of marginal incentives. Rising minimum wages exacerbate these distortions by pushing workers toward salient cutoffs. Correcting misperceptions yields nontrivial gains in aggregate labor income and GDP