DP3905 Household Labour Supply and Welfare Participation in Sweden

Author(s): Lennart Flood, J├Ârgen Hansen, Roger Wahlberg
Publication Date: May 2003
Keyword(s): household labour supply, microsimulation, unobserved heterogeneity, welfare
JEL(s): J20
Programme Areas: Labour Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=3905

In this Paper, we formulate and estimate a structural, static model of household labour supply and multiple welfare programme participation. Given the complicated nature of both the income tax schedule and the benefit rules for different welfare programmes, we use unique access to a very detailed micro-simulation model to generate accurate budget sets for each work-welfare combination. Moreover, when determining the budget sets, we use extraordinary high-quality data on earnings and other types of incomes, obtained both from employers and from income tax records. The results suggest that labour supply among two-parent families in Sweden is quite inelastic. A policy simulation designed to increase labour supply incentives for low income families generated substantial positive welfare effects, despite only minor increases in labour supply and decreases in welfare participation.