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Measuring Welfare Changes With Nonlinear Budget Constraints in Continuous and Discrete Hours Labour Supply Models


  • John Creedy

    () (Department of Economics, The University of Melbourne)

  • Guyonne Kalb

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


This paper examines the computation of exact welfare measures in the context of labour supply models. It is suggested that the standard method of computing compensating and equivalent variations does not allow su.ciently for the nonlinearity of the budget constraint. An exact method is suggested. The method is applied to contexts in which individuals are allowed to vary their hours continuously and where only a limited number of discrete hours of work are available. Discrete hours models have in recent years been used in view of the substantial econometric advantages when estimating the parameters of direct utility functions.

Suggested Citation

  • John Creedy & Guyonne Kalb, 2001. "Measuring Welfare Changes With Nonlinear Budget Constraints in Continuous and Discrete Hours Labour Supply Models," Melbourne Institute Working Paper Series wp2001n09, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  • Handle: RePEc:iae:iaewps:wp2001n09

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    References listed on IDEAS

    1. Richard Blundell & Alan Duncan & Julian McCrae & Costas Meghir, 2000. "The labour market impact of the working families’ tax credit," Fiscal Studies, Institute for Fiscal Studies, vol. 21(1), pages 75-103, March.
    2. Van Soest, A., 1992. "Discrete Choice Models of Family Labour Supply," Papers 9214, Tilburg - Center for Economic Research.
    3. Keane, Michael & Moffitt, Robert, 1998. "A Structural Model of Multiple Welfare Program Participation and Labor Supply," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 553-589, August.
    4. Creedy, John, 2000. "Measuring Welfare Changes and the Excess Burden of Taxation," Bulletin of Economic Research, Wiley Blackwell, vol. 52(1), pages 1-47, January.
    5. Callan, T. & van Soest, A.H.O., 1994. "Family labour supply and taxes in Ireland," Discussion Paper 1994-26, Tilburg University, Center for Economic Research.
    6. Hausman, Jerry A., 1985. "Taxes and labor supply," Handbook of Public Economics,in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 4, pages 213-263 Elsevier.
    7. Blomquist, N. Soren, 1983. "The effect of income taxation on the labor supply of married men in Sweden," Journal of Public Economics, Elsevier, vol. 22(2), pages 169-197, November.
    8. John Creedy, 2000. "Quadratic utility, labour supply and the welfare effects of tax changes," Australian Journal of Labour Economics (AJLE), Bankwest Curtin Economics Centre (BCEC), Curtin Business School, vol. 4(4), pages 270-278, December.
    9. Duncan, Alan & Weeks, Melvyn, 1997. "Behavioural tax microsimulation with finite hours choices," European Economic Review, Elsevier, vol. 41(3-5), pages 619-626, April.
    10. Creedy, John & Duncan, Alan, 2002. " Behavioural Microsimulation with Labour Supply Responses," Journal of Economic Surveys, Wiley Blackwell, vol. 16(1), pages 1-39, February.
    11. Hausman, Jerry A, 1981. "Exact Consumer's Surplus and Deadweight Loss," American Economic Review, American Economic Association, vol. 71(4), pages 662-676, September.
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    JEL classification:

    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure


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