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Income Distribution in Discrete Hours Behavioural Microsimulation Models: An Illustration of the Labour Supply and Distributional Effects of Social Transfers

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Author Info

  • John Creedy

    ()
    (The Treasury, Wellington, New Zealand)

  • Guyonne Kalb

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

  • Rosanna Scutella

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

Abstract

The distributional implications of an extreme hypothetical reform of the Australian tax-transfer system are examined using the Melbourne Institute Tax and Transfer Simulator. This simulation model predicts labour supply using a probabilistic discrete hours approach. The analysis of the distribution of income is difficult because, even for a small sample with a modest range of labour supply points, the range of possible combinations over the sample is extremely large. This paper demonstrates the use of a pseudo income distribution, where the probability of a particular labour supply value occurring (standardised by the population size) is used to refer to a particular position in the pseudo income distribution. The superior performance of the pseudo approach compared to using the expected income or taking 10 draws from the possible set of distributions is clearly illustrated by the simulation example for sole parents, in which the whole social security system is abolished. The example shows further that even if sole parents could move freely into the labour force, they do not manage to compensate fully for their loss of income when no benefit payments are available.

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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 wp2003n23.

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Length: 24 pages
Date of creation: Sep 2003
Date of revision:
Handle: RePEc:iae:iaewps:wp2003n23

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  1. Hilary Hoynes, 1993. "Welfare Transfers in Two-Parent Families: Labor Supply and Welfare Participation Under AFDC-UP," NBER Working Papers 4407, National Bureau of Economic Research, Inc.
  2. Michael P. Keane & Robert Moffitt, 1995. "A structural model of multiple welfare program participation and labor supply," Working Papers 557, Federal Reserve Bank of Minneapolis.
  3. Guyonne Kalb & Rosanna Scutella, 2002. "Estimation of Wage Equations in Australia: Allowing for Censored Observations of Labour Supply," Melbourne Institute Working Paper Series wp2002n08, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  4. Michael Gerfin & Robert E. Leu, 2003. "The Impact of In-Work Benefits on Poverty and Household Labour Supply. A simulation study for Switzerland," Diskussionsschriften dp0304, Universitaet Bern, Departement Volkswirtschaft.
  5. Foster, James & Greer, Joel & Thorbecke, Erik, 1984. "A Class of Decomposable Poverty Measures," Econometrica, Econometric Society, vol. 52(3), pages 761-66, May.
  6. Guyonne Kalb, 2002. "Estimation of Labour Supply Models for Four Separate Groups in the Australian Population," Melbourne Institute Working Paper Series wp2002n24, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  7. Moffitt, Robert, 1992. "Incentive Effects of the U.S. Welfare System: A Review," Journal of Economic Literature, American Economic Association, vol. 30(1), pages 1-61, March.
  8. Creedy, John & Duncan, Alan, 2002. " Behavioural Microsimulation with Labour Supply Responses," Journal of Economic Surveys, Wiley Blackwell, vol. 16(1), pages 1-39, February.
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Cited by:
  1. John Creedy & Guyonne Kalb, 2005. "Behavioural Microsimulation Modelling for Tax Policy Analysis in Australia: Experience and Prospects," Melbourne Institute Working Paper Series wp2005n02, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  2. John Creedy & Guyonne Kalb, 2005. "Behavioural Microsimulation Modelling With the Melbourne Institute Tax and Transfer Simulator(MITTS) : Uses and Extensions," Department of Economics - Working Papers Series 932, The University of Melbourne.

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