Benefit System and Marriage Dissolution Among Working Families

In this paper I use a tax and benefit micro-simulator of the U.K. welfare system to study the demographic challenges this country faces in relation to household formation. Specifically, I estimate to what extent the marriage penalties created by the welfare state can affect the divorce rate. The welfare system in the U.K subsidises the lone parenthood and the marriage penalties created by the system are found to be higher among low earning households. With the help of the tax and benefit simulator, I impute the counterfactual effect of divorce on the net benefit entitlements of a sub sample of working families. The traditional economic model of marriage implies that increasing public support for unmarried mothers generally increases the prevalence of single-headed households. My findings suggest that £100 weekly increase in marriage penalties increases the probability of divorce by around 7%