Evidences on Household Labour Supply: When Labour Demand is Not Perfectly Elastic
20 Pages Posted: 16 Nov 2011
Date Written: November 15, 2011
Abstract
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 behavioral micro-simulation models and their ability to evaluate tax-transfer reforms.
Keywords: labour supply, labour demand, equilibrium
JEL Classification: J22, H31, C35
Suggested Citation: Suggested Citation
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