Decomposing differences in labour force status between Indigenous and non-Indigenous Australians

Despite several policy efforts to promote economic participation by Indigenous Australians, they continue to have low participation rates compared to non-Indigenous Australians. This study decomposes the gap in labour market attachment between Indigenous and non- Indigenous Australians in non-remote areas, combining two separate data sources in a novel way to obtain access to richer information than was previously possible. It shows that among women at least two thirds of the gap can be attributed to differences in the observed characteristics between the two populations. For men, the differences in observed characteristics of the two populations can account for 36 to 47 percent of the gap. A detailed decomposition shows that lower education, worse health, and larger families (particularly for women) explain the lower labour market attachment of Indigenous Australians to a substantial extent. Compared with previous studies, this study is able to explain a larger proportion of the gap in employment between Indigenous and non-Indigenous people due to being able to include a larger set of explanatory variables. Authored by Guyonne Kalb, Trinh Le, Boyd Hunter and Felix Leung

New Zealand Labour Supply from 1991-2001: an analysis based on a discrete choice structural utility model

This paper presents results for four separately estimated sets of discrete choice labour supply models using the Household Economic Surveys from 1991/92 up to 2000/01. The New Zealand working-age population is divided into sole parents, single men, single women, and couples. The labour supply models use imputed wages for the non-workers. Some of the preference parameters for work and income are made dependent on personal and household characteristics to allow for heterogeneity in preferences among households. In addition, allowance is made for unobserved heterogeneity in preferences. The estimated parameters for the different groups are used to calculate confidence intervals for expected labour supply and the probability of working at the different discrete hours points. The effect of particular characteristics on labour supply is illustrated by computing marginal effects across the samples. The wage elasticities fall within the range of values found in other studies. Expected labour supply, predicted by using the estimated models, results in values close to the observed averages and confidence intervals around the expected values are reasonably narrow in most groups. The results are as anticipated and similar to results in other countries, with preferences for work being higher for people with higher education, who are in their thirties. Furthermore, for women the presence of young children decreases the preference for work. In addition to these variables, which are usually included in labour supply models, the “eligibility for New Zealand Superannuation†indicator and a “living with parents†indicator are included. For all groups, the delayed eligibility for the state provided superannuation scheme is found to increase labour supply. The indicator for living with one’s parents is found to increase labour supply for sole parents (indicating that living with one’s parents may be a childcare strategy), although the effect was not significant.New Zealand labour supply; discrete choice labour supply model; simulated maximum likelihood; simulated confidence intervals

Discrete Hours Labour Supply Modelling: Specification, Estimation and Simulation

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.Discrete hours labour supply, multinomial logit, maximum likelihood estimation, microsimulation

New Zealand Labour Supply from 1991-2001: An Analysis Based on a Discrete Choice Structural Utility Model

This paper presents results for four separately estimated sets of discrete choice labour supply models using the Household Economic Surveys from 1991/92 up to 2000/01. The New Zealand working-age population is divided into sole parents, single men, single women, and couples. The labour supply models use imputed wages for the non-workers. Some of the preference parameters for work and income are made dependent on personal and household characteristics to allow for heterogeneity in preferences among households. In addition, allowance is made for unobserved heterogeneity in preferences. The estimated parameters for the different groups are used to calculate confidence intervals for expected labour supply and the probability of working at the different discrete hours points. The effect of particular characteristics on labour supply is illustrated by computing marginal effects across the samples. The wage elasticities fall within the range of values found in other studies. Expected labour supply, predicted by using the estimated models, results in values close to the observed averages and confidence intervals around the expected values are reasonably narrow in most groups. The results are as anticipated and similar to results in other countries, with preferences for work being higher for people with higher education, who are in their thirties. Furthermore, for women the presence of young children decreases the preference for work. In addition to these variables, which are usually included in labour supply models, the “eligibility for New Zealand Superannuation” indicator and a “living with parents” indicator are included. For all groups, the delayed eligibility for the state provided superannuation scheme is found to increase labour supply. The indicator for living with one’s parents is found to increase labour supply for sole parents (indicating that living with one’s parents may be a childcare strategy), although the effect was not significant.New Zealand labour supply; discrete choice labour supply model; simulated maximum likelihood; simulated confidence intervals

Behavioural Microsimulation Modelling With the Melbourne Institute Tax and Transfer Simulator(MITTS) : Uses and Extensions

This paper describes microsimulation modelling in non-technical terms; and it explains what can be achieved with microsimulation modelling in general, and the Melbourne Institute Tax and Transfer Simulator (MITTS) in particular. The focus is on behavioural microsimulation modelling, which takes individuals’ labour supply responses into account when analysing tax and transfer reforms. Microsimulation models are built to replicate closely the considerable degree of heterogeneity observed in the population. Several examples of recent uses of MITTS are given and briefly described. In addition, one worked-out example is presented to illustrate some of the features and typical outputs of MITTS. Given the relatively recent development of behavioural microsimulation models, there are several opportunities for further extensions. For example, it would be valuable to allow for the demand side of labour, indicating whether new labour force participants are likely to find work; or to allow for life-cycle dynamics, which are important to deal with population-ageing issues or with female labour force participation.

Wage and Employment Rates in New Zealand from 1991 to 2001

This paper presents results for five separately estimated sets of employment and wage equations. The New Zealand working- age population is divided into sole parents, single men, single women, married men and married women. The results for the wage equations are as anticipated and similar to the results in other countries. A higher education level, living in a city and age (up to the early forties) increase the expected wage. Wages also differ significantly across industries and occupations. Employment follows the expected patterns as well, where women with children are less likely to be employed; education increases the employment probability; and living in remote areas decreases employment. In addition to the usual variables, unemployment affects the probability of employment negatively and a clear upward time trend is observed for sole parents, living with one’s parents decreases the employment probability of singles but increases the probability for sole parents, and eligibility for the New Zealand Superannuation seems relevant in the employment decision.Wage rate; employment; joint model specification

Comparing Welfare Change Measures withIncome Change Measures in Behavioural Policy Simulations

This paper presents a method of computing welfare changes (compensating and equivalent variations) arising from a tax or social security policy change, in the context of behavioural microsimulation modelling where individuals can choose between a limited number of discrete hours of work. The method allows fully for the nonlinearity of the budget constraint facing each individual, the probabilistic nature of the labour supply model and the presence of unobserved heterogeneity in the estimation of preference functions. An advantage of welfare measures, compared with changes in net incomes, is that they take into account the value of leisure and home production. The method is applied to hypothetical income tax policy changes in Australia and comparisons are made at the individual and the aggregate level. At the aggregate level a social welfare function is specified in terms of money metric utility. It is shown that policy evaluations based on welfare changes can be substantially different from those using only individuals' net income changes.Welfare change measures;equivalent variation; compensating variation; labour supplymodelling;nonlinear budget constraint

Tax Policy Design and The Role of a Tax-Free Threshold

This paper examines the role of the tax-free income tax threshold in a complex tax and transfer system consisting of a range of taxes and benefits, each with their own taper rates and thresholds. Considering a range of tax and benefit systems, particularly those having benefit taper rates whereby some benefits are received by income groups other than those at the bottom of the distribution, it is suggested that a tax-free threshold is not a necessary requirement to achieve redistribution. A policy change involving the elimination of the tax-free threshold in Australia and designed to achieve approximate revenue neutrality is examined using the Melbourne Institute Tax and Transfer Simulator. The results demonstrate that it is possible to eliminate the tax-free threshold under approximate overall revenue and distribution neutrality, but that labour supply incentives cannot be improved at the same time.

Dynamics of Household Joblessness: Evidence from Australian Micro-Data 2001–2007

This paper investigates the persistence over time of living in a jobless household, aiming to disentangle the roles of state dependence and unobserved heterogeneity. In addition, the potential heterogeneity of state dependence is examined through estimation of interaction terms with the lagged household joblessness variable. Finally, the robustness of results is explored through the use of alternative definitions of household joblessness each based on different variables available in our data. Using the two definitions that are most different, we find substantial state dependence which is larger for women than for men under both definitions. That is, being in a jobless household in the previous year increases the probability of currently living in a jobless household by 7.7 to 17.2 percentage points for men and 12.7 to 25.1 percentage points for women. Although state dependence clearly is an important factor, as are a number of observed characteristics, unobserved heterogeneity also plays an importantrole for men and women: 32 to 40 per cent of the unexplained variance can be attributed to unobserved heterogeneity for men, and for women this is 42 to 46 per cent. A few characteristics (age, disability, student status, living outside of major cities, having a university degree, presence of preschool children) seem to affect the level of state dependence to some extent. However, aside from the age effect, which can increase state dependence by up to 50 per cent for men aged 60 to 64, the level of state dependence seems fairly homogenous amongst men and amongst women.Household joblessness, state dependence, unobserved heterogeneity

Confidence Intervals for Policy Reforms in Behavioural Tax Microsimulation Modelling

This paper addresses the need for a measure of the uncertainty that is associated with the results calculated through tax policy behavioural microsimulation modelling. Deriving the analytical measure would be extremely complicated, therefore, a simulated approach is proposed which generates a pseudo sampling distribution of aggregate measures based on the sampling distribution of the estimated labour supply parameters. This approach, which is very computer intensive, is compared to a more time-efficient approach where the functional form of the sampling distribution is assumed to be normal. The results show that in many instances the results from the two approaches are quite similar. The exception is when aggregate measures for minor types of payments, involving relatively small groups of the population, are examined.