Welfare effects of tax policy change when there are choice restrictions on labour supply

Zhiyang Jia and Thor Thoresen

Discussion Papers from Statistics Norway, Research Department

Abstract: Information about individual choices of heterogeneous agents. Results can for example be used to describe the distributional effects of tax policy change, such as the effects on changes in money metric utility – distributions of equivalent and compensating variation (EV or CV). This type of “revealed preference” methodology relies on using models with sufficient realism. In this paper we argue that the so-called “job choice model” represents a way forward in practical work, as it has a richer representation of choice constraints than conventional labour supply models. This model is also particularly suitable given an increased focus on distinguishing between preferences and constraints in applied welfare analysis. We demonstrate the empirical content of the framework by describing the effects of the Norwegian tax reform 2013–2019 on the distribution of compensating variation (CV).

Keywords: labour supply; money metric utility; distributional effects; tax reform (search for similar items in EconPapers)
JEL-codes: C25 H31 I31 J22 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2021-08
New Economics Papers: this item is included in nep-eur, nep-lma, nep-pbe and nep-upt
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