Improving the Modeling of Couples' Labour Supply

43 Pages Posted: 6 Oct 2005

See all articles by Robert V. Breunig

Robert V. Breunig

Australian National University (ANU) - Crawford School of Public Policy

Deborah A. Cobb-Clark

School of Economics, University of Sydney; IZA Institute of Labor Economics

Xiaodong Gong

Australian National University (ANU) - School of Economics; IZA Institute of Labor Economics

Date Written: September 22, 2005

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 non-market 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

JEL Classification: C51, D10, J22

Suggested Citation

Breunig, Robert V. and Cobb-Clark, Deborah A. and Gong, Xiaodong, Improving the Modeling of Couples' Labour Supply (September 22, 2005). IZA Discussion Paper No. 1773. Available at SSRN: https://ssrn.com/abstract=809984

Robert V. Breunig (Contact Author)

Australian National University (ANU) - Crawford School of Public Policy ( email )

7 Liversidge Street
Lennox Crossing
Canberra, ACT 0200
Australia
61261252148 (Phone)

HOME PAGE: http://https://crawford.anu.edu.au/crawford_people/content/staff/rbreunig.php

Deborah A. Cobb-Clark

School of Economics, University of Sydney ( email )

606 Social Sciences Bldg. (A02)
The University of Sydney
Sydney, NSW 2006
Australia
61435061387 (Phone)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Xiaodong Gong

Australian National University (ANU) - School of Economics ( email )

Coombs Building 9
Canberra, Australian Capital Territory 0200
Australia
61 2 6125 4235 (Phone)
61 2 6125 0182 (Fax)

HOME PAGE: http://econrsss.anu.edu.au/Staff/gong/contact_xg.htm

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany
049 228/ 3894 527 (Phone)
049 228/ 3894 510 (Fax)

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