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Theoretical and Practical Arguments for Modeling Labor Supply as a Choice among Latent Jobs

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  • John K. Dagsvik
  • Zhiyang Jia
  • Tom Kornstad
  • Thor Olav Thoresen

Abstract

Models of labor supply derived from stochastic utility representations and discretized sets of feasible hours of work have gained popularity because they are more practical than the standard approaches based on marginal calculus. In this paper we argue that practicality is not the only feature that can be addressed by means of stochastic choice theory. This theory also offers a powerful framework for developing a more realistic model for labor supply choices, founded on individuals having preferences over jobs and facing restrictions on the choice of jobs and hours of work. We discuss and clarify how this modeling framework deviates from both the conventional discrete approach (Van Soest, 1995), as well as the standard textbook approach based on marginal calculus (Hausman, 1985). It is argued that a model based on job choice opens up for a more realistic representation of the choice environment, and consequently offers the possibility of conducting a richer set of simulations of alternative policies.

Suggested Citation

  • John K. Dagsvik & Zhiyang Jia & Tom Kornstad & Thor Olav Thoresen, 2012. "Theoretical and Practical Arguments for Modeling Labor Supply as a Choice among Latent Jobs," CESifo Working Paper Series 3708, CESifo.
    • Handle: RePEc:ces:ceswps:_3708
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    More about this item

    Keywords

    labor supply; random utility models; tax reform;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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