Improving the Modeling of Couples' Labour Supply

Robert Breunig, Deborah Cobb-Clark and Xiaodong Gong ()

No 499, CEPR Discussion Papers from Centre for Economic Policy Research, Research School of Economics, Australian National University

Abstract: We study the work hours of Australian couples, using a neoclassical labour-supply model in which couples choose from a small, realistic set of possible wife-husband working hour combinations. We introduce three improvements to this standard model. First, we allow partners' preferences about non-market time to be correlated. We also correct the estimates to accunt for the fact that we estimate the non-observable wage rates of individuals who do not work. Lastly, we allow each individual's preferences for nonmarket time to be correlated with her or his wage rate. These changes, which substantially enhance the realism of the standard, discretized labour-supply model, also have an important impact on the results. We estimate the model using HILDA data and find wage elasticities of labour supply - 0.26 for men and 0.50 for women - that are twice as large as those found without these three innovations. Using simulation methods, we then analyze the expected impact of the 2005/06 Australian tax reform. As a result of the tax cuts, we expect working hours to increase by 1.7 per cent for both men and women and household after-tax incomes to increase by approximately $60 per week on average. For families with two wage earners, each earning between $25,000 and $55,000 per year, our model predicts an after-tax increase in income of $38 after accounting for these labour supply effects - much larger than the Australian Government's own prediction of $12, which does not allow for labour supply effects.

Keywords: Family Labour Supply; Australia; Simulated Maximum Likelihood; Discretized Structural Model (search for similar items in EconPapers)
JEL-codes: C51 D10 J22 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2005-09
New Economics Papers: this item is included in nep-lab
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Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Improving the Modelling of Couples’ Labour Supply (2008)
Working Paper: Improving the Modeling of Couples' Labour Supply (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:auu:dpaper:499

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