Abstract

The IAB microsimulation model (IAB-MSM) is employed to estimate the effects of changes in the tax and transfer system on the labor supply of households. The empirical labor supply module of the IAB-MSM is of the discrete choice (DC) type. The DC model is based on the neoclassical model of household choice, in which a household chooses a utility maximizing combination of goods (in this case, consumption and leisure) subject to a budget constraint which is essentially determined by the hourly wages workers can attain and the tax and transfer schedule. The DC model of labor supply, which has become standard in the past two decades, neglects that not only quantitative characteristics of a job (hourly wages, working hours) but also qualitative characteristics – e.g., the type of occupation, the place of work and the working environment – play an important role when choosing a job. Likewise, the DC model ignores demand side constraints on the availability of jobs with certain quantitative and qualitative properties. The aim of the project is to implement a Random Ultility Random Opportunity (RURO) model of labor supply which explicitly takes into account individual restrictions on the availability of jobs.