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Simulating labor supply behavior when workers have preferences for job opportunities and face nonlinear budget constraints

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Author Info

  • Dagsvik, John K.

    ()
    (Statistics Norway, Research Department.)

  • Locatelli, Marilena

    ()
    (Department of Economics, University of Turin)

  • Strøm, Steinar

    ()
    (Dept. of Economics, University of Oslo)

Abstract

This paper analyzes the properties of a particular sectoral labor supply model developed and estimated in Dagsvik and Strøm (2006). In this model, agents have preferences over sectors and latent job attributes. Moreover, the model allows for a representation of the individual choice sets of feasible jobs in the economy. The properties of the model are explored by calculating elasticities and through simulations of the effects of particular tax reforms. The overall wage elasticities are rather small, but these small elasticities shadow for much stronger sectoral responses. An overall wage increase and, of course, a wage increase in the private sector only, gives women an incentive to shift their labor supply from the public to the private sector. Marginal tax rates were cut considerably in the 1992 tax reform. We find that the impact on overall labor supply is rather modest, but again these modest changes shadow for stronger sectoral changes. The tax reform stimulated the women to shift their labor from the public to the private sector and to work longer hours. A calculation of mean compensated variation shows that the richest households benefited far more from the 1992 tax reform than did the poorest households.

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Bibliographic Info

Paper provided by Oslo University, Department of Economics in its series Memorandum with number 20/2006.

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Length: 46 pages
Date of creation: 04 Oct 2006
Date of revision:
Handle: RePEc:hhs:osloec:2006_020

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Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway
Phone: 22 85 51 27
Fax: 22 85 50 35
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Web page: http://www.oekonomi.uio.no/indexe.html
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Keywords: Labor supply; married females; structural model; sectoral choice; wage elasticities; evaluation of tax reforms;

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References

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  1. Heckman, James J, 1974. "Shadow Prices, Market Wages, and Labor Supply," Econometrica, Econometric Society, Econometric Society, vol. 42(4), pages 679-94, July.
  2. Burtless, Gary & Hausman, Jerry A, 1978. "The Effect of Taxation on Labor Supply: Evaluating the Gary Negative Income Tax Experiments," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 86(6), pages 1103-30, December.
  3. Orley Ashenfelter & James Heckman, 1971. "The Estimation of Income and Substitution Effects in a Model of Family Labor Supply," Working Papers 402, Princeton University, Department of Economics, Industrial Relations Section..
  4. Aaberge, Rolf & Colombino, Ugo & Strom, Steinar, 1999. "Labour Supply in Italy: An Empirical Analysis of Joint Household Decisions, with Taxes and Quantity Constraints," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 14(4), pages 403-22, July-Aug..
  5. Tim Callan & Arthur Van Soest, 1996. "Family Labour Supply and Taxes in Ireland," Papers, Economic and Social Research Institute (ESRI) WP078, Economic and Social Research Institute (ESRI).
  6. John K. Dagsvik & Anders Karlstr�m, 2005. "Compensating Variation and Hicksian Choice Probabilities in Random Utility Models that are Nonlinear in Income," Review of Economic Studies, Oxford University Press, vol. 72(1), pages 57-76.
  7. John Creedy & Guyonne Kalb, 2003. "Discrete Hours Labour Supply Modelling: Specification, Estimation and Simulation," Treasury Working Paper Series 03/20, New Zealand Treasury.
  8. Aaberge, Rolf & Dagsvik, John K & Strom, Steinar, 1995. " Labor Supply Responses and Welfare Effects of Tax Reforms," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(4), pages 635-59, December.
  9. Roed,K. & Strom,S., 1999. "Progressive taxes and the labour market : is the trade-off between equality and efficiency inevitable?," Memorandum, Oslo University, Department of Economics 19/1999, Oslo University, Department of Economics.
  10. Dagsvik, John K. & Strøm, Steinar, 2004. "Sectoral labor supply, choice restrictions and functional form," Memorandum, Oslo University, Department of Economics 13/2004, Oslo University, Department of Economics.
  11. Joseph G. Altonji & Christina H. Paxson, 1987. "Labor Supply Preferences, Hours Constraints, and Hours-Wage Tradeoffs," NBER Working Papers 2121, National Bureau of Economic Research, Inc.
  12. Richard Blundell & Thomas MaCurdy, 1998. "Labour supply: a review of alternative approaches," IFS Working Papers, Institute for Fiscal Studies W98/18, Institute for Fiscal Studies.
  13. Bruce D. Meyer & Bradley T. Heim, 2004. "Structural Labor Supply Models when Budget Constraints are Nonlinear," Econometric Society 2004 North American Winter Meetings 567, Econometric Society.
  14. Dagsvik, John K, 1994. "Discrete and Continuous Choice, Max-Stable Processes, and Independence from Irrelevant Attributes," Econometrica, Econometric Society, Econometric Society, vol. 62(5), pages 1179-1205, September.
  15. Thomas MaCurdy & David Green & Harry Paarsch, 1990. "Assessing Empirical Approaches for Analyzing Taxes and Labor Supply," Journal of Human Resources, University of Wisconsin Press, vol. 25(3), pages 415-490.
  16. Atkinson, Anthony B., 1995. "The Welfare State and Economic Performance," National Tax Journal, National Tax Association, vol. 48(2), pages 171-98, June.
  17. repec:fth:stanho:e-90-11 is not listed on IDEAS
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Cited by:
  1. Di Tommaso, M. L. & Strøm, Steinar & Sæther, Erik Magnus, 2008. "Nurses Wanted: Is the Job Too Hars or is the Wage Too Low," Memorandum, Oslo University, Department of Economics 08/2008, Oslo University, Department of Economics.

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