Estimation of Labour Supply in New Zealand (WP 14/08)

Abstract

In this paper we estimate labour supply using a discrete choice approach for single men, single women and single parents and a joint labour supply equation for couples in New Zealand. The data are based on pooled cross-sectional data from the Household Economic Survey over 2006/07 to 2010/11. We allow singles to choose from eleven discrete hours whilst couples choose from 66 combined working hour choices. Net incomes at all possible discrete working-hours are calculated using Treasury’s TAXWELL microsimulation model. For non-workers, net incomes are estimated based on an imputed wage. In order to fit the model to the observed working hour distribution we include a fixed cost of working parameter and we explicitly take account of observed and unobserved heterogeneity in the data. We find that the coefficient estimates of the labour supply equations mostly accord with expectations and are reasonably comparable with previously estimated equations for New Zealand. Using the equations we find that the labour supply predictions fit the observed data reasonably well. However, despite the inclusion of a fixed cost of working parameter, the peak working hours of around 40 hours per week in the observed data is under-predicted by the models, while part-time hours of work remain over-predicted. We compute labour supply elasticities from the estimated parameters which show that single parents and single women are the most responsive, whilst partnered men and single men are the least responsive.

Acknowledgements

Access to the data used in this paper was provided by Statistics New Zealand in accordance with security and confidentiality provisions of the Statistics Act 1975. We would like to thank John Creedy and Guyonne Kalb for their helpful comments and Jesse Eedrah and Kieran Paton for their technical assistance in creating net incomes at different discrete labour supply points for all households in the Household Expenditure Survey. This paper was undertaken while Joseph Mercante was on secondment to the New Zealand Treasury.

Disclaimer

The views, opinions, findings, and conclusions or recommendations expressed in this Working Paper are strictly those of the authors. They do not necessarily reflect the views of the New Zealand Treasury or the New Zealand Government. The New Zealand Treasury and the New Zealand Government take no responsibility for any errors or omissions in, or for the correctness of, the information contained in these working papers. The paper is presented not as policy, but with a view to inform and stimulate wider debate.