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Improving the Modeling of Couples' Labour Supply

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Author Info
Robert Breunig
Deborah Cobb-Clark
Xiaodong Gong

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Abstract

We study the work hours of Australian couples, using a neoclassical labour-supply model in which couples choose from a small, realistic set of possible wife-husband working hour combinations. We introduce three improvements to this standard model. First, we allow partners' preferences about non-market time to be correlated. We also correct the estimates to accunt for the fact that we estimate the non-observable wage rates of individuals who do not work. Lastly, we allow each individual's preferences for nonmarket time to be correlated with her or his wage rate. These changes, which substantially enhance the realism of the standard, discretized labour-supply model, also have an important impact on the results. We estimate the model using HILDA data and find wage elasticities of labour supply - 0.26 for men and 0.50 for women - that are twice as large as those found without these three innovations. Using simulation methods, we then analyze the expected impact of the 2005/06 Australian tax reform. As a result of the tax cuts, we expect working hours to increase by 1.7 per cent for both men and women and household after-tax incomes to increase by approximately $60 per week on average. For families with two wage earners, each earning between $25,000 and $55,000 per year, our model predicts an after-tax increase in income of $38 after accounting for these labour supply effects - much larger than the Australian Government's own prediction of $12, which does not allow for labour supply effects.

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Publisher Info
Paper provided by Centre for Economic Policy Research, Research School of Social Sciences, Australian National University in its series CEPR Discussion Papers with number 499.

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Length: 42 pages
Date of creation: Sep 2005
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Handle: RePEc:auu:dpaper:499

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Related research
Keywords: Family Labour Supply; Australia; Simulated Maximum Likelihood; Discretized Structural Model;

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Find related papers by JEL classification:
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
D10 - Microeconomics - - Household Behavior - - - General
J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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References listed on IDEAS
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    Other versions:
  4. Jones, Glenn & Savage, Elizabeth, 1996. "An Evaluation of Income Splitting with Variable Female Labour Supply," The Economic Record, The Economic Society of Australia, vol. 72(218), pages 224-35, September.
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    Other versions:
  8. Heckman, James J, 1979. "Sample Selection Bias as a Specification Error," Econometrica, Econometric Society, vol. 47(1), pages 153-61, January. [Downloadable!] (restricted)
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    Other versions:
  13. John Creedy & Guyonne Kalb & Hsein Kew, 2003. "Flattening the Effective Marginal Tax Rate Structure in Australia: Policy Simulations Using the Melbourne Institute Tax and Transfer Simulator," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 36(2), pages 156-172. [Downloadable!] (restricted)
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  15. Euwals, Rob & van Soest, Arthur, 1999. "Desired and actual labour supply of unmarried men and women in the Netherlands," Labour Economics, Elsevier, vol. 6(1), pages 95-118, March. [Downloadable!] (restricted)
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  16. Denise J. Doiron, 2004. "Welfare Reform and the Labour Supply of Lone Parents in Australia: A Natural Experiment Approach," The Economic Record, The Economic Society of Australia, vol. 80(249), pages 157-176, 06. [Downloadable!] (restricted)
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    Other versions:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Guyonne Kalb, 2007. "Children, Labour Supply and Childcare: Challenges for Empirical Analysis," Melbourne Institute Working Paper Series wp2007n15, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne. [Downloadable!]
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