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Estimating Labor Supply Responses and Welfare Participation: Using a Natural Experiment to Validate a Structural Labor Supply Model

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Author Info

  • Hansen, Jörgen

    ()
    (Concordia University)

  • Liu, Xingfei

    ()
    (IZA)

Abstract

In this paper, we formulate and estimate an economic model of labor supply and welfare participation. The model is estimated on data on single men from Quebec drawn from the 1986 Canadian Census. Budget sets for each work-welfare combination – accounting for income taxes, tax credits and welfare benefit rules – are derived using a microsimulation model. We validate our model by comparing reactions to a welfare reform that implied a dramatic increase in welfare benefits predicted by our model to those obtained by using a regression discontinuity approach. The results show that our model is capable of recovering actual changes in labor supply and welfare participation. We also show the advantage of having estimated a structural model by illustrating how labor supply and welfare participation change when benefit levels change.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5718.

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Length: 33 pages
Date of creation: May 2011
Date of revision:
Handle: RePEc:iza:izadps:dp5718

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Related research

Keywords: labor supply; welfare participation; unobserved heterogeneity; natural experiment; regression discontinuity; microsimulation;

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Cited by:
  1. Pronzato, Chiara D., 2012. "Comparing Quasi-Experimental Designs and Structural Models for Policy Evaluation: The Case of a Reform of Lone Parental Welfare," IZA Discussion Papers 6803, Institute for the Study of Labor (IZA).
  2. Chiara Pronzato, 2013. "Fighting Lone Mothers' Poverty through in-Work Benefits - Methodological Issues and Policy Suggestions," CESifo Working Paper Series 4375, CESifo Group Munich.
  3. Kurowska, Anna & Myck, Michal & Wrohlich, Katharina, 2012. "Family and Labor Market Choices: Requirements to Guide Effective Evidence-Based Policy," IZA Discussion Papers 6846, Institute for the Study of Labor (IZA).
  4. Thor O. Thoresen & Trine E. Vattø, 2013. "Validation of structural labor supply model by the elasticity of taxable income," Discussion Papers 738, Research Department of Statistics Norway.
  5. Kabatek, J., 2013. "Iteration Capping For Discrete Choice Models Using the EM Algorithm," Discussion Paper 2013-019, Tilburg University, Center for Economic Research.
  6. Pronzato, Chiara Daniela, 2014. "Fighting Lone Mothers’ Poverty through In-Work Benefits Methodological Issues and Policy Suggestions," Department of Economics and Statistics Cognetti de Martiis. Working Papers 201420, University of Turin.

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