MK-Labour – Labour Supply Model

Finance Think maintains and adjusts the MK-Labour – Labour Supply Model for Macedonia. MK-Labour is a discrete-choice structural labour supply (van Soest, 1995). MK-Labour has two sub-models: one estimates the preferences for singles and the other for couples. The computation of the model is STATA-based and relies on a maximum-likelihood estimation of a conditional logit function. Together with MK-MOD, MK-Labour constitutes a behavioural tax and benefit model.

MK-Labour is based on the assumption that a household can choose among a finite number of working hours. Each hour corresponds to a given level of disposable income and each discrete bundle of working hours and income provides a different level of utility, the latter being also dependent on a set of household characteristics. The assumption is that each partner in a couple may work 0, 20 or 40 hours, corresponding to non-participation, part-time and full-time employment, respectively, leading to nine alternatives for a couple and providing a triplet of disposable income and working hours of the female and the male partner. Total income is the sum of net labour and non-labour income, pensions and social benefits, whereby only the labour income and social assistance are dependent on the choice of the working hours and the respective wage rates.

For inactive and unemployed workers the hourly wage is not observed. MK-Labour relies on the predictions from Heckman’s (1979) selection estimation of a standard Mincerian earnings function.

After disposable income for all choices and for all individuals, employed and non-employed, is calculated, MK-Labour applies the ML method on a conditional logit function in the next step, so as to find out the preference parameters in the utility function. Finally, the model estimates the labour supply effects by comparing the predicted probability of each choice under the pre-reform and post-reform conditions, in case the effects of particular reforms are being simulated. Predicted probabilities of the post-reform scenarios are based on the optimal behaviour conditional on the pre-reform budget constraints, i.e. the same estimates from the pre-reform conditional logit coefficients, and the new income, from the post-reform scenario.

Reference:

Van Soest, A. (1995) Structural models of family labor supply: A discrete choice approach. Journal of Human Resources, 30, 63-88.

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