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Intransigencies in the Labour Supply Choice

  • Mark N. Harris

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

  • Alan Duncan

    (School of Economics, The University of Nottingham)

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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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
Contact details of provider: Postal: Melbourne Institute of Applied Economic and Social Research, The University of Melbourne, Victoria 3010 Australia
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  1. Hausman, Jerry A, 1985. "The Econometrics of Nonlinear Budget Sets," Econometrica, Econometric Society, vol. 53(6), pages 1255-82, November.
  2. Jerry A. Hausman & Paul Ruud, 1984. "Family Labor Supply With Taxes," NBER Working Papers 1271, National Bureau of Economic Research, Inc.
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