Estimating Labor Supply Responses and Welfare Participation: Using a “Natural” Experiment to Validate a Structural Labor Supply Model

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IZA Seminar

Place: Schaumburg-Lippe-Str. 9, 53113 Bonn

Date: 25.05.2010, 12:15 - 13:30


Presentation by 

Jörgen Hansen (Concordia University)


In this paper, we formulate and estimate a relatively simple economic model of labor supply and welfare participation. The model is estimated on data on single men from Quebec drawn from the 1986 Canadian Census. Budget sets for each work-welfare combination - accounting for income taxes, tax credits and welfare benefit rules - are derived. We validate our model by comparing reactions to a welfare reform that implied a dramatic increase in welfare benefits predicted by our model to those reported in Lemieux and Milligan (2008), who estimate the effects of the same welfare reform using a regression discontinuity approach. The results show that our model is capable of recovering true changes in welfare participation from changes in the benefit structure. We then illustrate the benefit of having estimated a structural model by illustrating changes in labor supply and welfare participation from various levels of benefit changes. Finally, we use our estimated preference parameters to analyze how labor supply among single men in Quebec reacts to other changes in the budget sets, such as wages and income taxes

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