Tax-benefit systems and differences in aggregate labour force participation: Comparative evidence from the Czech Republic and Hungary

•Participation elasticities are essentially identical in the Czech Republic and Hungary.•The lower participation rate in Hungary is related to higher personal income taxes and a more generous welfare system.•About one-third of the difference in the aggregate participation rates can be explained by differences in the tax and transfer systems.•For prime-age individuals, more than two-thirds of the differences in the participation rates are related to the tax-benefit systems. This paper investigates the extent to which cross-country differences in aggregate participation rates can be explained by differences in tax-benefit systems. We take the example of two countries, the Czech Republic and Hungary, which – despite a lot of similarities – differ markedly in labour force participation rates. Using comparable individual-level labour supply estimates, we simulate how the aggregate participation rate would change in one country if the other country’s tax and social welfare system were adopted. The estimation results for the two countries are quite similar, suggesting that individual preferences are essentially identical in the two countries. The simulation results show that about one-third of the difference in the participation rates of the 15–74 year-old population and more than two-thirds of the participation of the prime-age population can be explained by differences in the tax-benefit systems.