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Evidences on Household Labour Supply when Labour Demand is not Perfectly Elastic Keywords: Labour Supply, Labour Demand, Equilibrium

  • Edlira Narazani

    ()

The simulations of tax-benefit reforms with labour supply models often implicitly assume perfectly elastic labour demand, an assumption that may lead to unrealistic results. In this study we attempt to address this limitation and show how the interaction between labour supply and labour demand would affect the outcome of a certain reform. We introduce a “wage subsidy scheme”, as it is commonly proved to produce labor incentives and find that, when labour demand is not considered as perfectly elastic, the simulated labor supply results to be lower for women compared to the perfectly elastic scenario but higher for their male partners. We explain this disparate behavior through the differences in cross wage elasticities the selected couples exhibit and the way labour preferences are shared between partners. These empirical findings provide a new understanding of behavioural microsimulation models and their ability to evaluate tax-transfer reforms.

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Paper provided by CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY in its series CHILD Working Papers with number wp22_11.

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Length: 20 pages
Date of creation: Dec 2011
Date of revision:
Handle: RePEc:wpc:wplist:wp22_11
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  1. Stefan Boeters & Michael Feil & Nicole Gürtzgen, 2005. "Discrete Working Time Choice in an Applied General Equilibrium Model," Computational Economics, Society for Computational Economics, vol. 26(3), pages 1-29, November.
  2. Peichl, Andreas & Siegloch, Sebastian, 2012. "Accounting for labor demand effects in structural labor supply models," Labour Economics, Elsevier, vol. 19(1), pages 129-138.
  3. Stefan Boeters & Michael Feil, 2009. "Heterogeneous Labour Markets in a Microsimulation–AGE Model: Application to Welfare Reform in Germany," Computational Economics, Society for Computational Economics, vol. 33(4), pages 305-335, May.
  4. Creedy, John & Duncan, Alan, 2002. " Behavioural Microsimulation with Labour Supply Responses," Journal of Economic Surveys, Wiley Blackwell, vol. 16(1), pages 1-39, February.
  5. Ugo Colombino & Marilena Locatelli & Edlira Narazani & Cathal O’Donoghue, 2010. "Alternative Basic Income Mechanisms: An Evaluation Exercise with a Microeconometric Model," CHILD Working Papers wp04_10, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY.
  6. John Creedy & Alan Duncan, 2001. "Aggregating labour supply and feedback effects in microsimulation," IFS Working Papers W01/24, Institute for Fiscal Studies.
  7. Narazani, Edlira & Shima, Isilda, 2008. "Labour supply modelling in Italy when Minimum Income Scheme is an option," EUROMOD Working Papers EM6/08, EUROMOD at the Institute for Social and Economic Research.
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