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

  • Creedy, J.
  • Kalb, G.

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 sufficiently 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.

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Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 799.

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Length: 29 pages
Date of creation: 2001
Date of revision:
Handle: RePEc:mlb:wpaper:799
Note: This paper has now been published in: Creedy, J. and Kalb G. (2005) Measuring Welfare Changes in Labour Supply Models, Manchester School, 73, no.6, pp. 664-685.
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  1. 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.
  2. 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.
  3. Hausman, Jerry A, 1981. "Exact Consumer's Surplus and Deadweight Loss," American Economic Review, American Economic Association, vol. 71(4), pages 662-76, September.
  4. 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 553-89, August.
  5. Tim Callan & Arthur Van Soest, 1996. "Family Labour Supply and Taxes in Ireland," Papers WP078, Economic and Social Research Institute (ESRI).
  6. 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.
  7. Van Soest, A., 1992. "Discrete Choice Models of Family Labour Supply," Papers 9214, Tilburg - Center for Economic Research.
  8. Duncan, Alan & Weeks, Melvyn, 1997. "Behavioural tax microsimulation with finite hours choices," European Economic Review, Elsevier, vol. 41(3-5), pages 619-626, April.
  9. 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.
  10. 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.
  11. 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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