Simulating labor supply behaviour when workers have preferences over job opportunities and face non-linear budget constraints

A female labor supplied model including sectoral choice, estimated on data from Norway, 1994 has been used in simulation to yield labor supply elasticities. We find that these elasticities are declining with the wage level of the women. The overall elasticities are rather small, but these small elasticities shadow for much stronger sectoral responses. A wage increase gives the women an incentive to shift labor supply from the public to the private sector. This occurs despite the fact that education and experiences have a slightly higher return in the public than in the private sector. The reasons for our result are that in the private sector wages are more dispersed and hours are less regulated. Marginal tax rates were cut considerably in the 1992 tax reform. We find that the impact on overall labor supply is rather modest, but again these modest changes shadow for stronger sectoral changes. The tax reform stimulated the women to shift their labor from the public to the private sector and to work longer hours. A calculation of the expected value of changes in household welfare shows that the richest households benefited far more from the 1992 tax reform than the poorest household.