Stochastic Problems in the Simulation of Labor Supply

Modern work in labor supply attempts to account for nonlinear budget sets created by government tax and transfer programs. Progressive taxation leads to nonlinear convex budget sets while the earned income credit, social security contributions, AFDC, and the proposed NIT plans all lead to nonlinear, nonconvex budget sets. Where nonlinear budget sets occur, the expected value of the random variable, labor supply, can no longer be calculated by simply 'plugging in' the estimated coefficients. Properties of the stochastic terms which arise from the residual or from a stochastic preference structure need to be accounted for. This paper considers both analytical approaches and Monte Carlo approaches to the problem. We attempt to find accurate and low cost computational techniques which would permit extensive use of simulation methodology. Large samples are typically included in such simulations which makes computational techniques an important consideration. But these large samples may also lead to simplifications in computational techniques because of the averaging process used in calculation of simulation results. This paper investigates the tradeoffs available between computational accuracy and cost in simulation exercises over large samples.

Choice Under Uncertainty: A Model of Applications for the Social Security Disability Insurance Program

Not all people with health problems are disabled. Some individuals with severe physical or mental impairments, such as blindness or limb amputation, continue to hold jobs and generally function satisfactorily.They constitute, however, a group of potentially disabled individuals who might apply and qualify for Disability Insurance or other disability-related benefits if they were to lose their jobs or to decide that employment offered an inadequate financial or non-pecuniary reward. Thus, disability, or a health-related inability to work, is more than a medical problem but involves motivational and attitudinal factors. We specify a model of the application process, which we model as choice under uncertainty about approval of an application for Disability Insurance. We specify the possible outcomes to the choice process of an individual in which the probability of acceptance for Disability Insurance is a key consideration. We then estimate a joint model of labor supply and application to the Disability Insurance program based on the 1972 survey. We then compare our results to the observed time series applications process since 1976. Lastly, we estimate the sensitivity of the application process to the probability of acceptance and the level of benefits.

"Double Dipping": The Combined Effects of Social Security and Civil Service Pensions on Employee Retirement

We consider the retirement behavior of civilian employees of the United States government. Unlike previous studies, this investigation is based upon a data set containing fairly complete and accurate information about the Social Security and employer-provided pensions for which employees are (or ultimately will be) eligible. These data permit us to specify the financial aspects of individual retirement decisions with a reasonable degree of precision. A large fraction of civil service pensioners is eligible to receive Social Security benefits because a part of their working careers was spent in Social-Security-covered employment. The prevalence of double pension coverage among government employees has raised serious equity questions about the treatment of civil servants by Social Security, and these questions have led to various suggestions for pension reform. Partly, the reform proposals have been put forward due to the perceived unfairness of "double dipping" which arises from the double pension coverage of government employees. Our analysis finds: (1) Both the amount of a Federal pension entitlement and the expected wait until the pension commences affect the timing of retirement from the Federal service. (2) The rate of anticipated wage growth significantly affects individual decisions to remain in Federal employment. (3) Workers who are eligible to ultimately receive Social Security in some cases show a different pattern of retirement than do workers not vested in Social Security. However, our analysis does not reveal any massive shift of Federal workers into Social-Security-covered employment in order to benefit from the "tilt" in the Social Security formula.

Family Labor Supply With Taxes

Over the period 1960 - 1983 the proportion of federal tax revenue raised by taxation of labor supply has risen from 57-77 percent. In this paper, we specify and estimate a model of family labor supply which treats both federal and state taxation. Husbands and wives labor supply are treated jointly rather than in aseparate manner as in previous research. A method to calculate the virtual wage for nonworking spouses is used within a utility maximizing framework to treat correctly the joint family labor supply decision. Joint family efforts are found to be important. The efficiency cost (deadweight loss) of labor taxation is estimated to be 29.6% of tax revenue raised. The effect of the new 10% deduction to ease the marriage tax for working spouses leads to a prediction of 3.8% increase in wives labor supply and a .9% decrease in husbands labor supply.Overall taxes paid are predicted to decrease by 3.4%.