Equilibrium Policy Simulations with Random Utility Models of Labour Supply

15 Pages Posted: 25 Oct 2010

See all articles by Ugo Colombino

Ugo Colombino

University of Turin - Department of Economics

Abstract

Many microeconometric models of discrete labour supply include alternative-specific constants meant to account for (possibly besides other factors) the density or accessibility of particular types of jobs (e.g. part-time jobs vs. full-time jobs). The most common use of these models is the simulation of tax-transfer reforms. The simulation is usually interpreted as a comparative static exercise, i.e. the comparison of different equilibria induced by different policy regimes. The simulation procedure, however, typically keeps fixed the estimated alternative-specific constants. In this note we argue that this procedure is not consistent with the comparative statics interpretation. Equilibrium means that the number of people willing to work on the various job types must be equal to the number of available jobs. Since the constants reflect the number of jobs and since the number of people willing to work change as a response to the change in tax-transfer regime, it follows that the constants should also change. A structural interpretation of the alternative-specific constants leads to the development of a simulation procedure consistent with the comparative static interpretation. The procedure is illustrated with an empirical example.

Keywords: alternative-specific constants, simulation of tax reforms, labour supply, discrete choice, random utility, equilibrium simulation

JEL Classification: C35, C53, H31, J22

Suggested Citation

Colombino, Ugo, Equilibrium Policy Simulations with Random Utility Models of Labour Supply. IZA Discussion Paper No. 5262. Available at SSRN: https://ssrn.com/abstract=1696886

Ugo Colombino (Contact Author)

University of Turin - Department of Economics ( email )

Via Po, 53
Torino, 10124
Italy

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