Enhancing tax-benefit modelling functionality: labour supply responses in UKMOD

Matteo Richiardi, Justin van de Ven, Daria Popova and Natasha Brooks

No CEMPA4/26, Centre for Microsimulation and Policy Analysis Working Paper Series from Centre for Microsimulation and Policy Analysis at the Institute for Social and Economic Research

Abstract: This paper describes the integration of labour supply behavioural responses into UKMOD, the UK tax-benefit microsimulation model belonging to the EUROMOD family. Traditional static models quantify only the direct (“morning after†) fiscal and distributional effects of policy reforms, abstracting from behavioural adjustment. We outline a practical framework for extending such models to incorporate indirect effects, with a focus on labour supply responses at both the intensive and extensive margins.After reviewing the evolution of the empirical literature on labour supply elasticities and the distinction between structural and reduced-form approaches, we motivate the adoption of an elasticity-based reduced-form method. While structural random utility models offer theoretically consistent counterfactual analysis, they are computationally demanding and less transparent for routine policy work. By contrast, externally estimated elasticities - widely used by UK institutions - provide a tractable and policy-aligned alternative.We detail the design of the Behavioural Responses (BVR) add-on introduced in UKMOD in 2023. The module computes marginal and average effective tax rates, distinguishes responses to changes in marginal versus average rates, and applies assumed taxable income elasticities to generate post-reform behavioural adjustments. Implementation requires a limited number of simulation loops and preserves transparency and computational efficiency.

Date: 2026-03-04
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