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Intransigencies in the Labour Supply Choice

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  • Mark N. Harris

    (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)

  • Alan Duncan

    (School of Economics, The University of Nottingham)

Abstract

There have been significant recent advances in the estimation of labour supply models. Here the hours continuum is split into a number of discrete options and the preferred choice obtained as the solution to a constrained utility maximisation problem. However, the underlying probabilities of an individual being in a particular hours state, are assumed to be those given by standard Logit-type ones. As is well known, such a specification embodies the underlying Independence of Irrelevant Alternatives (IIA) property, which is likely to be violated in a model of labour supply choices. Moreover, if such models are used in microsimulation, they implicitly assume that individuals are able to change their observed hours state at the margin following a policy reform. This paper suggests an alternative general (non-IIA) specification for these probabilities, which can additionally incorporate the fact that: individuals may be captive to certain choices (for example, due to institutional reasons). Moreover, this model has the benefit that when used for microsimulation, the reform has to work harder to coax individuals out of the captive hours states. The results suggest that, for sole parents, the Logit model is misspecified and there is a significant amount of captivity, most notably to full-time employment hours. The effect of such captivity on microsimulation is illustrated by considering a range of actual and hypothetical policy reform.

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Bibliographic Info

Paper provided by Melbourne Institute of Applied Economic and Social Research, The University of Melbourne in its series Melbourne Institute Working Paper Series with number wp2002n17.

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Length: 30 pages
Date of creation: Sep 2002
Date of revision:
Handle: RePEc:iae:iaewps:wp2002n17

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  1. Hausman, Jerry & Ruud, Paul, 1984. "Family Labor Supply with Taxes," American Economic Review, American Economic Association, vol. 74(2), pages 242-48, May.
  2. Hausman, Jerry A, 1985. "The Econometrics of Nonlinear Budget Sets," Econometrica, Econometric Society, vol. 53(6), pages 1255-82, November.
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Cited by:
  1. John Creedy & Guyonne Kalb, 2003. "Discrete Hours Labour Supply Modelling: Specification, Estimation and Simulation," Treasury Working Paper Series 03/20, New Zealand Treasury.
  2. Veronica Amarante & Rodrigo Arim & Gioia de Melo & Andrea Vigorito, 2010. "Family Allowances and Child School Attendance: An ex-ante Evaluation of Alternative Schemes in Uruguay," Working Papers PMMA 2010-07, PEP-PMMA.
  3. Bargain, Olivier & Orsini, Kristian & Peichl, Andreas, 2011. "Labor Supply Elasticities in Europe and the US," IZA Discussion Papers 5820, Institute for the Study of Labor (IZA).
  4. R. Aaberge & T. Wennemo & U. Colombino, 2008. "Evaluating Alternative Representations of the Choice Sets in Models of Labour Supply," CHILD Working Papers wp20_08, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY.
  5. Olivier Bargain, 2007. "On Modeling Household Labor Supply With Taxation," Working Papers 200711, School Of Economics, University College Dublin.
  6. Olivier Bargain & Kristian Orsini & Andreas Peichl, 2012. "Comparing Labor Supply Elasticities in Europe and the US: New Results," Working Papers halshs-00805736, HAL.

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