Abstract

http://ssrn.com/abstract=1958754
 
 

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A Continuous Labour Supply Model in Microsimulation: A Life-Cycle Modelling Approach with Heterogeneity and Uncertainty Extension


Jinjing Li


Maastricht University

Denisa Maria Sologon


Maastricht University - Department of Accounting and Information Management


IZA Discussion Paper No. 6098

Abstract:     
This paper advances a structural inter-temporal model of labour supply that is able to simulate the dynamics of labour supply in a continuous setting and to circumvent two main drawbacks of most of the existing models. The first limitation is the inability to incorporate individual heterogeneity as every agent is sharing the same parameters of the utility function. The second one is the strong assumption that individuals make decisions in a world of perfect certainty. Essentially, this paper offers an extension of marginal-utility-of-wealth-constant labour supply functions known as "Frisch functions" under certainty and uncertainty with homogenous and heterogeneous preferences. Two alternative models are proposed for capturing individual heterogeneity. First, a "fixed effect vector decomposition" model, which allows the individual specific effects to be correlated with the explanatory variables included in the labour supply model, and second, a mixed fixed and random coefficient model, which incorporates a higher degree of individual heterogeneity by specifying individual coefficients. Uncertainty is controlled for by introducing an expectation correction into the model. The validation of each simulation model is realized in comparison with the standard Heckman model. The lifetime models based on the fixed effect vector decomposition yield the most stable and unbiased simulation results, both under certainty and uncertainty. Due to its improved accuracy and stability, this lifetime labour supply model is particularly suitable for enhancing the performance of the pension models, thus providing a better reference for policymaking.

Number of Pages in PDF File: 27

Keywords: lifetime labour supply, dynamic microsimulation

JEL Classification: C20, D90, J22

working papers series


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Date posted: November 13, 2011  

Suggested Citation

Li, Jinjing and Sologon, Denisa Maria, A Continuous Labour Supply Model in Microsimulation: A Life-Cycle Modelling Approach with Heterogeneity and Uncertainty Extension. IZA Discussion Paper No. 6098. Available at SSRN: http://ssrn.com/abstract=1958754

Contact Information

Jinjing Li
Maastricht University ( email )
P.O. Box 616
Maastricht, 6200MD
Netherlands
Denisa Maria Sologon
Maastricht University - Department of Accounting and Information Management ( email )
Netherlands
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