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A Structural Labor Supply Model with Nonparametric Preferences

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  • Soest, A.H.O. van
  • Das, J.W.M.
  • Gong, X.

    (Tilburg University, Center for Economic Research)

Abstract

Nonparametric techniques are usually seen as a statistic device for data description and exploration, and not as a tool for estimating models with a richer economic structure, which are often required for policy analysis.This paper presents an example where nonparametric flexibility can be attained in a fully structural model.A structural labour supply model with a nonparametric specification of preferences is introduced, which can be used for the analysis of all sorts of (non-linear) tax and benefits changes.Moreover, the model can deal with several other problems in estimation of structural labour supply models, such as non-convex tax rules, benefits, unobserved wages of non-workers, and model coherency.The utility maximization problem is solved by discretizing the budget set and choosing the optimal leisure and income combination from a finite set of alternatives.The direct utility function is approximated with a series expansion.For a given length of the expansion, the model is estimated by smooth simulated maximum likelihood.The wage equation is estimated jointly with the labour supply model, and measurement errors in wage rates are allowed for. The model is estimated with Dutch data on labour supply of married females, for various lengths of the series expansion.Estimates of labour supply elasticities and effects of a proposed tax reform suggest that the results do not change much once the order of the series expansion is extended beyond two, even though the second order model is statistically rejected against higher order models.Monte Carlo simulations are used to show that the estimation strategy has remarkably good finite sample properties for the size of our sample.On the other hand they lead to some concern about the potential bias to measurement error in the hours variable.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2000-60.

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Date of creation: 2000
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Handle: RePEc:dgr:kubcen:200060

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References

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  1. Moffitt, Robert, 1984. "The Estimation of a Joint Wage-Hours Labor Supply Model," Journal of Labor Economics, University of Chicago Press, vol. 2(4), pages 550-66, October.
  2. Blomquist, Soren, 1995. "Restrictions in labor supply estimation: Is the MaCurdy critique correct?," Economics Letters, Elsevier, vol. 47(3-4), pages 229-235, March.
  3. Heckman, James & Singer, Burton, 1984. "A Method for Minimizing the Impact of Distributional Assumptions in Econometric Models for Duration Data," Econometrica, Econometric Society, vol. 52(2), pages 271-320, March.
  4. Keane, Michael & Moffitt, Robert, 1998. "A Structural Model of Multiple Welfare Program Participation and Labor Supply," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 553-89, August.
  5. Moffitt, Robert, 1986. "The Econometrics of Piecewise-Linear Budget Constraints: A Survey and Exposition of the Maximum Likelihood Method," Journal of Business & Economic Statistics, American Statistical Association, vol. 4(3), pages 317-28, July.
  6. Hausman, Jerry A, 1985. "The Econometrics of Nonlinear Budget Sets," Econometrica, Econometric Society, vol. 53(6), pages 1255-82, November.
  7. Richard Blundell & Thomas MaCurdy, 1998. "Labour supply: a review of alternative approaches," IFS Working Papers W98/18, Institute for Fiscal Studies.
  8. Pollak, Robert A & Wales, Terence J, 1979. "Welfare Comparisons and Equivalence Scales," American Economic Review, American Economic Association, vol. 69(2), pages 216-21, May.
  9. V.A. Hajivassiliou & P. A. Ruud, 1993. "Classical Estimation Methods for LDV Models Using Simulation," Econometrics 9311002, EconWPA.
  10. Blundell, Richard & Walker, Ian, 1986. "A Life-Cycle Consistent Empirical Model of Family Labour Supply Using Cross-Section Data," Review of Economic Studies, Wiley Blackwell, vol. 53(4), pages 539-58, August.
  11. William T. Dickens & Shelly J. Lundberg, 1985. "Hours Restrictions and Labor Supply," NBER Working Papers 1638, National Bureau of Economic Research, Inc.
  12. 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.
  13. Arthur van Soest & Isolde Woittiez & Arie Kapteyn, 1990. "Labor Supply, Income Taxes, and Hours Restrictions in the Netherlands," Journal of Human Resources, University of Wisconsin Press, vol. 25(3), pages 517-558.
  14. Moffitt, Robert, 1990. "The Econometrics of Kinked Budget Constraints," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 119-39, Spring.
  15. Gallant, A Ronald & Nychka, Douglas W, 1987. "Semi-nonparametric Maximum Likelihood Estimation," Econometrica, Econometric Society, vol. 55(2), pages 363-90, March.
  16. Blomquist, Soren, 1996. "Estimation methods for male labor supply functions How to take account of nonlinear taxes," Journal of Econometrics, Elsevier, vol. 70(2), pages 383-405, February.
  17. Soest, Arthur van & Kapteyn, Arie & Kooreman, Peter, 1993. "Coherency and regularity of demand systems with equality and inequality constraints," Journal of Econometrics, Elsevier, vol. 57(1-3), pages 161-188.
  18. Macurdy, T. & Green, D. & Paarsch, H., 1990. "Assessing Empirical Approaches For Analyzing Taxes And Labor Supply," Working Papers e-90-11, Hoover Institution, Stanford University.
  19. Macurdy, T. & Green, D. & Paarsch, H., 1990. "Assessing Empirical Approaches For Analyzing Taxes And Labor Supply," Working Papers e-90-11, Hoover Institution, Stanford University.
  20. Soest, A.H.O. van, 1992. "Discrete choice models of family labour supply," Discussion Paper 1992-14, Tilburg University, Center for Economic Research.
  21. Blomquist, Sören & Newey, Whitney, 1997. "Nonparametric Estimation of Labor Supply Functions Generated by Piece Wise Linear Budget Constraints," Working Paper Series 1997:24, Uppsala University, Department of Economics.
  22. Soest, A.H.O. van & Das, J.W.M., 2000. "Family Labor Supply and Proposed Tax Reforms in the Netherlands," Discussion Paper 2000-20, Tilburg University, Center for Economic Research.
  23. Heckman, James J, 1979. "Sample Selection Bias as a Specification Error," Econometrica, Econometric Society, vol. 47(1), pages 153-61, January.
  24. Killingsworth, Mark R. & Heckman, James J., 1987. "Female labor supply: A survey," Handbook of Labor Economics, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 1, chapter 2, pages 103-204 Elsevier.
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Cited by:
  1. BARGAIN Olivier & DOLLS Mathias & NEUMANN Dirk & PEICHL Andreas & SIEGLOCH Sebastian, 2011. "Tax-Benefit Systems in Europe and the US: Between Equity and Efficiency," CEPS/INSTEAD Working Paper Series 2011-11, CEPS/INSTEAD.
  2. Bargain, Olivier, 2009. "Flexible labor supply models," Economics Letters, Elsevier, vol. 105(1), pages 103-105, October.
  3. Olivier Bargain, 2004. "On modeling household labor supply with taxation," DELTA Working Papers 2004-14, DELTA (Ecole normale supérieure).
  4. Anil Kumar, 2005. "Nonparametric estimation of the impact of taxes on female labor supply," Working Papers 05-05, Federal Reserve Bank of Dallas.

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