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Evaluating Alternative Representations of the Choice Sets in Models of Labour Supply

During the last two decades, the discrete-choice modelling of labour supply decisions has become increasingly popular, starting with Aaberge et al. (1995) and van Soest (1995). Within the literature adopting this approach there are however two potentially important issues that are worthwhile analyzing in their implications and that so far have not been given the attention they might deserve. A first issue concerns the procedure by which the discrete alternatives are selected to enter the choice set. For example van Soest (1995) chooses (non probabilistically) a set of fixed points identical for every individual. This is by far the most widely adopted method. By contrast, Aaberge et al. (1995) adopt a sampling procedure suggested by McFadden (1978) and also assume that the choice set may differ across the households. A second issue concerns the availability of the alternatives. Most authors assume all the values of hours-of-work within some range [0, H] are equally available. At the other extreme, some authors assume only two or three alternatives (e.g. non-participation, part-time and full-time) are available for everyone. Aaberge et al. (1995) assume instead that not all the hour opportunities are equally available to everyone; they specify a probability density function of opportunities for each individual and the discrete choice set used in the estimation is built by sampling from that individual-specific density function. In this paper we explore by simulation the implications of - the procedure used to build the choice set (fixed alternatives vs sampled alternatives) - accounting or not accounting for a different availability of alternatives. The way the choice set is represented seems to have little impact on the fitting of observed values, but a more significant and important impact on the out-of-sample prediction performance.

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Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 449.

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Date of creation: Mar 2006
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Handle: RePEc:ssb:dispap:449
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  1. Arthur van Soest, 1995. "Structural Models of Family Labor Supply: A Discrete Choice Approach," Journal of Human Resources, University of Wisconsin Press, vol. 30(1), pages 63-88.
  2. Duncan, Alan & Weeks, Melvyn, 1997. "Behavioural tax microsimulation with finite hours choices," European Economic Review, Elsevier, vol. 41(3-5), pages 619-626, April.
  3. Ugo Colombino & Steinar Strøm & Rolf Aaberge, 2000. "Labor supply responses and welfare effects from replacing current tax rules by a flat tax: Empirical evidence from Italy, Norway and Sweden," Journal of Population Economics, Springer, vol. 13(4), pages 595-621.
  4. Richard Blundell & Thomas MaCurdy, 1998. "Labour supply: a review of alternative approaches," IFS Working Papers W98/18, Institute for Fiscal Studies.
  5. Tom Kornstad & Thor O. Thoresen, 2004. "Means-Testing the Child Benefit," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 50(1), pages 29-49, 03.
  6. Rolf Aaberge & Ugo Colombino & Steinar Strøm, 2004. "Do more equal slices shrink the cake? An empirical investigation of tax-transfer reform proposals in Italy," Journal of Population Economics, Springer, vol. 17(4), pages 767-785, December.
  7. Gaundry, Marc J. I. & Dagenais, Marcel G., 1979. "The dogit model," Transportation Research Part B: Methodological, Elsevier, vol. 13(2), pages 105-111, June.
  8. John Creedy & Guyonne Kalb, 2003. "Discrete Hours Labour Supply Modelling: Specification, Estimation and Simulation," Treasury Working Paper Series 03/20, New Zealand Treasury.
  9. 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.
  10. Aaberge, Rolf & Colombino, Ugo & Strom, Steinar, 1999. "Labour Supply in Italy: An Empirical Analysis of Joint Household Decisions, with Taxes and Quantity Constraints," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(4), pages 403-22, July-Aug..
  11. Dagsvik, John K, 1994. "Discrete and Continuous Choice, Max-Stable Processes, and Independence from Irrelevant Attributes," Econometrica, Econometric Society, vol. 62(5), pages 1179-1205, September.
  12. James J. Heckman, 1974. "Effects of Child-Care Programs on Women's Work Effort," NBER Chapters, in: Marriage, Family, Human Capital, and Fertility, pages 136-169 National Bureau of Economic Research, Inc.
  13. Daniel McFadden, 1977. "Modelling the Choice of Residential Location," Cowles Foundation Discussion Papers 477, Cowles Foundation for Research in Economics, Yale University.
  14. James J. Heckrnan, 1974. "Effects of Child-Care Programs on Women's Work Effort," NBER Chapters, in: Economics of the Family: Marriage, Children, and Human Capital, pages 491-524 National Bureau of Economic Research, Inc.
  15. Moffitt, Robert, 1986. "The Econometrics of Piecewise-Linear Budget Constraints: A Survey and Exposition of the Maximum Likelihood Method," Journal of Business & Economic Statistics, American Statistical Association, vol. 4(3), pages 317-28, July.
  16. Mark N. Harris & Alan Duncan, 2002. "Intransigencies in the Labour Supply Choice," Melbourne Institute Working Paper Series wp2002n17, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  17. Blomquist, N. Soren, 1988. "Nonlinear taxes and labor supply," European Economic Review, Elsevier, vol. 32(6), pages 1213-1226, July.
  18. Tim R.L. Fry & Mark N. Harris, 2002. "The DOGEV Model," Monash Econometrics and Business Statistics Working Papers 7/02, Monash University, Department of Econometrics and Business Statistics.
  19. Thomas MaCurdy & David Green & Harry Paarsch, 1990. "Assessing Empirical Approaches for Analyzing Taxes and Labor Supply," Journal of Human Resources, University of Wisconsin Press, vol. 25(3), pages 415-490.
  20. A. Zabalza & C. Pissarides & M. Barton, 1980. "Social security and the choice between full-time work, part-time work and retirement," NBER Chapters, in: Econometric Studies in Public Finance, pages 245-276 National Bureau of Economic Research, Inc.
  21. Hausman, Jerry A., 1979. "The econometrics of labor supply on convex budget sets," Economics Letters, Elsevier, vol. 3(2), pages 171-174.
  22. Aaberge, Rolf & Dagsvik, John K & Strom, Steinar, 1995. " Labor Supply Responses and Welfare Effects of Tax Reforms," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(4), pages 635-59, December.
  23. Rolf Aaberge & Ugo Colombino & Steinar Strøm & Tom Wennemo, 2005. "Joint Labour Supply of Married Couples: Efficiency and Distribution Effects of Tax and Labour Market Reforms," Labor and Demography 0501004, EconWPA.
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