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Discrete Choice Labor Supply: Conditional Logit vs. Random Coefficient Models

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  • Peter Haan

Abstract

Estimating labor supply functions using a discrete rather than a continuous specification has become increasingly popular in recent years. On basis of the German Socioeconomic Panel (GSOEP) I test which specification of discrete choice is the appropriate model for estimating labor supply: the standard conditional logit model or the random coefficient model. To the extent that effect heterogeneity is present in empirical models of labor supply functions, the application of a random coefficient model is necessary to avoid biased estimates. However, because of the complex structure, random coefficient models defy calculating confidence intervals of marginal effects or elasticities. Therefore, if heterogeneity is nonexistent or does not lead to a significant bias in the derived labor supply elasticities, standard discrete choice models provide the more favorable choice. Due to their simple structure, conditional logit models are far less computational intensive providing standard tools to calculate confidence intervals of elasticities. My findings suggest that effect heterogeneity is present when estimating a discrete choice model of labor supply drawing on data of the GSOEP. However, the labor supply elastisities derived form the specifications with and without random effects do not differ significantly. That leads to the conclusion that the standard discrete choice model, attractive for its simple structure, provides an adequate model choice for the analysis of labor supply functions based on the GSOEP.

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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 394.

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Length: 19 p.
Date of creation: 2004
Date of revision:
Handle: RePEc:diw:diwwpp:dp394

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Keywords: Labor supply; Discrete choice models; Specification test;

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  7. Michael Gerfin & Robert E. Leu, 2003. "The Impact of In-Work Benefits on Poverty and Household Labour Supply. A simulation study for Switzerland," Diskussionsschriften, Universitaet Bern, Departement Volkswirtschaft dp0304, Universitaet Bern, Departement Volkswirtschaft.
  8. Heckman, James & Singer, Burton, 1984. "A Method for Minimizing the Impact of Distributional Assumptions in Econometric Models for Duration Data," Econometrica, Econometric Society, Econometric Society, vol. 52(2), pages 271-320, March.
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Cited by:
  1. Rana HENDY & Chahir ZAKI, 2009. "“Rethinking the Redistribution Effects of Trade Liberalization in Egypt : A Microsimulation Analysis”," Working Papers, Centre de Recherche en Economie et Statistique 2009-23, Centre de Recherche en Economie et Statistique.
  2. Peter Haan & Viktor Steiner, 2005. "Labor Market Effects of the German Tax Reform 2000," Discussion Papers of DIW Berlin 472, DIW Berlin, German Institute for Economic Research.
  3. Peter Haan & Viktor Steiner, 2004. "Distributional and Fiscal Effects of the German Tax Reform 2000: A Behavioral Microsimulation Analysis," Discussion Papers of DIW Berlin 419, DIW Berlin, German Institute for Economic Research.
  4. Bargain, Olivier & Orsini, Kristian, 2004. "In-work policies in Europe: killing two birds with one stone?," EUROMOD Working Papers EM4/04, EUROMOD at the Institute for Social and Economic Research.
  5. Peichl, Andreas & Fuest, Clemens & Schaefer, Thilo, 2005. "Dokumentation FiFoSiM: Integriertes Steuer-Transfer-Mikrosimulations- und CGE-Modell," FiFo Discussion Papers - Finanzwissenschaftliche Diskussionsbeiträge 05-3, University of Cologne, FiFo Institute for Public Economics.
  6. LI Jinjing & SOLOGON Denisa, 2011. "A Continuous Labour Supply Model in Microsimulation: A Life-cycle Modelling Approach with Heterogeneity and Uncertainty Extension," CEPS/INSTEAD Working Paper Series 2011-57, CEPS/INSTEAD.
  7. Pacifico, Daniele, 2009. "A behavioral microsimulation model with discrete labour supply for Italian couples," MPRA Paper 14198, University Library of Munich, Germany.
  8. Melanie Arntz & Stefan Boeters & Nicole Gürtzgen & Stefanie Schubert, 2006. "Analysing Welfare Reform in a Microsimulation-AGE Model," Computing in Economics and Finance 2006, Society for Computational Economics 109, Society for Computational Economics.
  9. Arntz, Melanie & Boeters, Stefan & Gürtzgen, Nicole & Schubert, Stefanie, 2006. "Analysing welfare reform in a microsimulation-AGE model: the value of disaggregation," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 06-76, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  10. Viktor Steiner & Katharina Wrohlich, 2005. "Work Incentives and Labor Supply Effects of the ‘Mini-Jobs Reform’ in Germany," Empirica, Springer, Springer, vol. 32(1), pages 91-116, 03.
  11. Viktor Steiner & Katharina Wrohlich, 2004. "Household Taxation, Income Splitting and Labor Supply Incentives: A Microsimulation Study for Germany," Discussion Papers of DIW Berlin 421, DIW Berlin, German Institute for Economic Research.
  12. Viktor Steiner & Katharina Wrohlich, 2004. "Work Incentives and Labor Supply Effects of the 'Mini-Jobs Reform' in Germany," Discussion Papers of DIW Berlin 438, DIW Berlin, German Institute for Economic Research.
  13. Katharina Wrohlich, 2004. "Child Care Costs and Mothers' Labor Supply: An Empirical Analysis for Germany," Discussion Papers of DIW Berlin 412, DIW Berlin, German Institute for Economic Research.

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