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    Intransigencies in the labour supply choice

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    Author
    Harris, Mark N.; DUNCAN, ALAN
    Date
    2002-09
    University of Melbourne Author/s
    HARRIS, MARK NORMAN
    Affiliation
    Economics and Commerce: Melbourne Institute of Applied Economic and Social Research
    Metadata
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    Document Type
    Preprint
    Citations
    Harris, Mark N. and Duncan, Alan (2002) Intransigencies in the labour supply choice.
    Access Status
    Open Access
    URI
    http://hdl.handle.net/11343/33651
    Description

    ISBN 0734025410, MIWP no. 17/2002. ISSN 13284991

    Abstract
    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
    Keywords
    Labour supply; discreet choice; institutional effects; simulated policy response; JEL H25; business taxes and subsidies.

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