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The assumption behind discrete hours labour supply modelling is that utility-maximising individuals choose from a relatively small number of hours levels, rather than being able to vary hours worked continuously. Such models are becoming widely used in view of their substantial advantages, compared with a continuous hours approach, when estimating and their role in tax policy microsimulation. This paper provides an introduction to the basic analytics of discrete hours labour supply modelling. Special attention is given to model specification, maximum likelihood estimation and microsimulation of tax reforms. The analysis is at each stage illustrated by the use of numerical examples.
We should like to thank Nathan McClellan and Jenny Williams for comments on an earlier draft of this paper
The views expressed in this Working Paper are those of the author(s) and do not necessarily reflect the views of the New Zealand Treasury. The paper is presented not as policy, but with a view to inform and stimulate wider debate.
Table of Contents
- 1 Introduction
- 2 The basic model
- 3 A numerical example of hours probabilities
- 4 Specification of the error distribution
- 5 Parameter estimation
- 6 A numerical example of estimation
- 7 Alternative specifications
- 8 Tax reforms and simulations
- 9 Conclusions
- Appendix: An iterative solution procedure