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Estimating Labor Supply Responses and Welfare Participation: Using a Natural Experiment to Validate a Structural Labor Supply Model

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  • Jörgen Hansen

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  • Xingfei Liu
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    Abstract

    In this paper, we formulate and estimate an economic model of labor supply and welfare participation. The model is estimated on data on single men from Quebec drawn from the 1986 Canadian Census. Budget sets for each work-welfare combination - accounting for income taxes, tax credits and welfare benefit rules - are derived using a microsimulation model. We validate our model by comparing reactions to a welfare reform that implied a dramatic increase in welfare benefits predicted by our model to those obtained by using a regression discontinuity approach. The results show that our model is capable of recovering actual changes in labor supply and welfare participation. We also show the advantage of having estimated a structural model by illustrating how labor supply and welfare participation change when benefit levels change.

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    Bibliographic Info

    Paper provided by CIRANO in its series CIRANO Working Papers with number 2011s-53.

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    Date of creation: 01 Jul 2011
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    Handle: RePEc:cir:cirwor:2011s-53

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    Related research

    Keywords: labor supply; welfare participation; unobserved heterogeneity; natural experiment; regression discontinuity; microsimulation;

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    Cited by:
    1. Kurowska, Anna & Myck, Michal & Wrohlich, Katharina, 2012. "Family and Labor Market Choices: Requirements to Guide Effective Evidence-Based Policy," IZA Discussion Papers 6846, Institute for the Study of Labor (IZA).
    2. Pronzato, Chiara D., 2012. "Comparing Quasi-Experimental Designs and Structural Models for Policy Evaluation: The Case of a Reform of Lone Parental Welfare," IZA Discussion Papers 6803, Institute for the Study of Labor (IZA).
    3. Thor O. Thoresen & Trine E. Vattø, 2013. "Validation of structural labor supply model by the elasticity of taxable income," Discussion Papers 738, Research Department of Statistics Norway.
    4. Chiara Pronzato, 2013. "Fighting Lone Mothers' Poverty through in-Work Benefits - Methodological Issues and Policy Suggestions," CESifo Working Paper Series 4375, CESifo Group Munich.
    5. Kabatek, J., 2013. "Iteration Capping For Discrete Choice Models Using the EM Algorithm," Discussion Paper 2013-019, Tilburg University, Center for Economic Research.

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