International and Country Perspectives
Edited by Iris Claus, Norman Gemmell, Michelle Harding and David White
Chapter 8: Modelling Labour Supply Responses in Australia and New Zealand
Guyonne Kalb* INTRODUCTION 8.1 This chapter discusses the use of labour supply modelling to inform behavioural responses in tax policy microsimulation models and compares New Zealand with Australia. Typically, as in this case, discrete choice structural labour supply models are chosen for their ability to incorporate detailed tax and social security system information. Given the use of these microsimulation models to predict the effect of tax policy changes, this is obviously important. A distinguishing feature of microsimulation models is the use of a large cross-sectional dataset providing information about the characteristics of individuals and households, including their labour supply, earnings and, in some cases but not in the models discussed in this chapter, expenditure. Therefore an advantage of microsimulation models is that they can replicate to a large extent the heterogeneity observed in the population. A behavioural microsimulation model predicting labour supply responses to policy changes consists of three components. The first, discussed in section 8.2, is an accounting or arithmetic microsimulation model, sometimes called a static model. This component computes net household incomes for a sample of households, for current, previous or hypothetical tax-benefit regimes. The second component is a quantifiable behavioural model of individual tastes for net income and labour supply, which is used to simulate individuals’ preferred labour supply under a given set of economic circumstances. The third component consists of a procedure to allocate to each individual a preferred supply of hours conditional on the relevant taxbenefit system. Analysing simulated changes in this allocation of labour...