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Equilibrium Policy Experiments and the Evaluation of Social Programs

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  • Jeremy Lise

    ()
    (Queen's University)

  • Shannon Seitz

    ()
    (Queen's University)

  • Jeffrey Smith

    ()
    (University of Michigan)

Abstract

In this paper we provide new and convincing evidence on the presence and magnitude of feedback effects associated with 'make work pay' policies currently under consideration in the US, Canada, the UK and other developed countries. We build a general equilibrium model of the labor market and use the model to study the effects of policies currently implemented in practice only as small-scale social experiments. The evidence from our model experiments is particularly compelling as we first test the partial equilibrium implications of our model using experimental data: in particular, we calibrate the model to the control group in a randomized experiment and find the model predicts the program group outcomes and the experimental impact estimates very well. We then use the model to quantify the effects of the experimental program introduced in general equilibrium. We apply our methodology to the evaluation of the Canadian Self-Sufficiency Project (SSP), a policy providing generous financial incentives for Income Assistance (IA) recipients to obtain stable employment. Our results reveal several important feedback effects associated with the SSP policy; taken together, these feedback effects reverse the cost-benefit conclusions implied by the partial equilibrium experimental evaluation. The substantial general equilibrium effects reported here are illustrative of the feedback effects that are likely to arise in a broad range of other programs that seek to 'make work pay' through the subsidization of search and work.

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File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_1076.pdf
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Bibliographic Info

Paper provided by Queen's University, Department of Economics in its series Working Papers with number 1076.

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Length: 54 pages
Date of creation: Apr 2005
Date of revision:
Handle: RePEc:qed:wpaper:1076

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Keywords: Program evaluation; policy experiments; Self-Sufficiency Project; welfare; social experiments; equilibrium search models;

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References

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  1. Heckman, James J & Lochner, Lance & Taber, Christopher, 1998. "General-Equilibrium Treatment Effects: A Study of Tuition Policy," American Economic Review, American Economic Association, vol. 88(2), pages 381-86, May.
  2. Albrecht, James & van den Berg, Gerard J. & Vroman, Susan, 2005. "The Knowledge Lift: The Swedish Adult Education Program That Aimed to Eliminate Low Worker Skill Levels," IZA Discussion Papers 1503, Institute for the Study of Labor (IZA).
  3. Davidson, Carl & Woodbury, Stephen A, 1993. "The Displacement Effect of Reemployment Bonus Programs," Journal of Labor Economics, University of Chicago Press, vol. 11(4), pages 575-605, October.
  4. Jeffrey Smith & Petra Todd, 2003. "Does Matching Overcome Lalonde's Critique of Nonexperimental Estimators?," University of Western Ontario, CIBC Centre for Human Capital and Productivity Working Papers 20035, University of Western Ontario, CIBC Centre for Human Capital and Productivity.
  5. Christiano, Lawrence J & Eichenbaum, Martin, 1992. "Current Real-Business-Cycle Theories and Aggregate Labor-Market Fluctuations," American Economic Review, American Economic Association, vol. 82(3), pages 430-50, June.
  6. Lin, Zhengxi, 1998. "Employment Insurance in Canada: Recent Trends and Policy Changes," Analytical Studies Branch Research Paper Series 1998125e, Statistics Canada, Analytical Studies Branch.
  7. Van der Linden, Bruno, 2005. "Equilibrium Evaluation of Active Labor Market Programmes Enhancing Matching Effectiveness," IZA Discussion Papers 1526, Institute for the Study of Labor (IZA).
  8. Jeremy Lise & Shannon Seitz & Jeffrey Smith, 2006. "Evaluating Search and Matching Models Using Experimental Data," Working Papers 1074, Queen's University, Department of Economics.
  9. Lars Peter Hansen & James J. Heckman, 1996. "The Empirical Foundations of Calibration," Journal of Economic Perspectives, American Economic Association, vol. 10(1), pages 87-104, Winter.
  10. Bent Jesper Christensen & Rasmus Lentz & Dale T. Mortensen & George R. Neumann & Axel Werwatz, 2003. "On the Job Search and the Wage Distribution," CAM Working Papers 2004-09, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics.
  11. Garry F. Barrett & Michael I. Cragg, 1998. "An Untold Story: The Characteristics of Welfare Use in British Columbia," Canadian Journal of Economics, Canadian Economics Association, vol. 31(1), pages 165-188, February.
  12. LaLonde, Robert J, 1986. "Evaluating the Econometric Evaluations of Training Programs with Experimental Data," American Economic Review, American Economic Association, vol. 76(4), pages 604-20, September.
  13. Browning, Edgar K, 1987. "On the Marginal Welfare Cost of Taxation," American Economic Review, American Economic Association, vol. 77(1), pages 11-23, March.
  14. Card, D. & Michalopoulos, C. & Robins, P.K., 2001. "Measuring Wage Growth Among Former Welfare Recipients," Papers 2001-5, Gouvernement du Canada - Human Resources Development.
  15. James J. Heckman & Jeffrey A. Smith, 1998. "Evaluating the Welfare State," NBER Working Papers 6542, National Bureau of Economic Research, Inc.
  16. Mortensen, Dale T, 1982. "Property Rights and Efficiency in Mating, Racing, and Related Games," American Economic Review, American Economic Association, vol. 72(5), pages 968-79, December.
  17. Pissarides, C A, 1984. "Efficient Job Rejection," Economic Journal, Royal Economic Society, vol. 94(376a), pages 97-108, Supplemen.
  18. W. Erwin Diewert, 1988. "On Tax Reform," Canadian Journal of Economics, Canadian Economics Association, vol. 21(1), pages 1-40, February.
  19. David Card & Dean R. Hyslop, 2005. "Estimating the Effects of a Time-Limited Earnings Subsidy for Welfare-Leavers," Econometrica, Econometric Society, vol. 73(6), pages 1723-1770, November.
  20. Diamond, Peter A, 1982. "Wage Determination and Efficiency in Search Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 49(2), pages 217-27, April.
  21. Connolly, Helen & Gottschalk, Peter T., 2004. "Do Earnings Subsidies Affect Job Choice?," IZA Discussion Papers 1322, Institute for the Study of Labor (IZA).
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