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Equilibrium policy simulations with random utility models of labour supply

Author

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  • Ugo Colombino
Abstract
Many microeconometric models of discrete labour supply include alternative-specific constants meant to account for (possibly besides other factors) the density or accessibility of particular types of jobs (e.g. parttime jobs vs. full-time jobs). The most common use of these models is the simulation of tax-transfer reforms. The simulation is usually interpreted as a comparative static exercise, i.e. the comparison of different equilibria induced by different policy regimes. The simulation procedure, however, typically keeps fixed the estimated alternative-specific constants. In this note we argue that this procedure is not consistent with the comparative statics interpretation. Equilibrium means that the number of people willing to work on the various job types must be equal to the number of available jobs. Since the constants reflect the number of jobs and since the number of people willing to work change as a response to the change in tax-transfer regime, it follows that the constants should also change. A structural interpretation of the alternative-specific constants leads to the development of a simulation procedure consistent with the comparative static interpretation. The procedure is illustrated with an empirical example.

Suggested Citation

  • Ugo Colombino, 2010. "Equilibrium policy simulations with random utility models of labour supply," Carlo Alberto Notebooks 156, Collegio Carlo Alberto.
    • Handle: RePEc:cca:wpaper:156
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    References listed on IDEAS

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    1. John Creedy & Alan Duncan, 2005. "Aggregating Labour Supply and Feedback Effects in Microsimulation," Australian Journal of Labour Economics (AJLE), Bankwest Curtin Economics Centre (BCEC), Curtin Business School, vol. 8(3), pages 277-290, September.
    2. Ugo Colombino, 2010. "Equilibrium policy simulations with random utility models of labour supply," Carlo Alberto Notebooks 156, Collegio Carlo Alberto.
    3. Colombino, Ugo, 2011. "Five Issues in the Design of Income Support Mechanisms: The Case of Italy," IZA Discussion Papers 6059, Institute of Labor Economics (IZA).
    4. Sutherland, Holly, 2001. "EUROMOD: an integrated European benefit-tax model: final report," EUROMOD Working Papers EM9/01, EUROMOD at the Institute for Social and Economic Research.
    5. repec:bla:scandj:v:97:y:1995:i:4:p:635-59 is not listed on IDEAS
    6. 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 403-422, July-Aug..
    7. Rolf Aaberge & Ugo Colombino, 2014. "Labour Supply Models," Contributions to Economic Analysis, in: Handbook of Microsimulation Modelling, volume 127, pages 167-221, Emerald Group Publishing Limited.
    8. Rolf Aaberge & Ugo Colombino, 2011. "Empirical Optimal Income Taxation: A Microeconometric Application to Norway," CHILD Working Papers wp16_11, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY.
    9. Dagsvik, John K, 2000. "Aggregation in Matching Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(1), pages 27-57, February.
    10. John K. Dagsvik & Steinar StrØm, 2006. "Sectoral labour supply, choice restrictions and functional form," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(6), pages 803-826, September.
    11. Rolf Aaberge & Ugo Colombino, 2005. "Designing Optimal Taxes With a Microeconometric Model of Household Labour Supply," Public Economics 0510013, University Library of Munich, Germany.
    12. 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.
    13. Rolf Aaberge & Ugo Colombino, 2012. "Accounting for family background when designing optimal income taxes: a microeconometric simulation analysis," Journal of Population Economics, Springer;European Society for Population Economics, vol. 25(2), pages 741-761, January.
    14. Colombino Ugo & Locatelli Marilena & Narazani Edlira & O'Donoghue Cathal, 2010. "Alternative Basic Income Mechanisms: An Evaluation Exercise With a Microeconometric Model," Basic Income Studies, De Gruyter, vol. 5(1), pages 1-31, September.
    15. Tom Kornstad & Thor Thoresen, 2007. "A discrete choice model for labor supply and childcare," Journal of Population Economics, Springer;European Society for Population Economics, vol. 20(4), pages 781-803, October.
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    Cited by:

    1. Colombino Ugo & Narazani Edlira, 2013. "Designing a Universal Income Support Mechanism for Italy: An Exploratory Tour," Basic Income Studies, De Gruyter, vol. 8(1), pages 1-17, July.
    2. Holly Sutherland & Francesco Figari, 2013. "EUROMOD: the European Union tax-benefit microsimulation model," International Journal of Microsimulation, International Microsimulation Association, vol. 1(6), pages 4-26.
    3. Colombino, Ugo, 2010. "Equilibrium Policy Simulations with Random Utility Models of Labour Supply," IZA Discussion Papers 5262, Institute of Labor Economics (IZA).
    4. Ugo Colombino, 2011. "Five issues in the design of income support mechanisms. The case of Italy," CHILD Working Papers wp21_11, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY.

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    More about this item

    Keywords

    Random Utility; Discrete Choice; Labour Supply; Simulation of tax reforms; Alternative-specific constants; Equilibrium simulation;
    All these keywords.

    JEL classification:

    • C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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