A labor supply model for married couples with non-convex budget sets and latent rationing

Abstract

The basic assumption in this paper is that individuals make their choices from a set of latent discrete alternatives, called matches. Given the match, hours of work, wages and non-pecuniary characteristics follow. This model allows for very general budget specifications as well as restrictions on job opportunities and hours of work. The model is estimated on Norwegian data from 1979. Some of the results are summarized in wage elasticities and it is demonstrated that they are in the range of what others have obtained. Moreover, aggregate elasticities Which reflect observed as well as unobserved heterogeneity are calculated. We also report estimates derived from alternative specifications of the budget set, ranging from ignorance of taxes at all to a detailed specification of all sorts of taxes and transfers. The results of tax policy simulations are included in the final section of the paper.