TAX AND BENEFIT REFORMS

Transcription

1 European Nework of Eonom Poly Researh Insues TAX AND BENEFIT REFORMS IN A MODEL OF LABOUR MARKET TRANSITIONS MICHAL MYCK AND HOWARD REED ENEPRI RESEARCH REPORT NO. 25 OCTOBER 2006 ENEPRI Researh Repors are desgned o make he resuls of researh underaken whn he framework of he European Nework of Eonom Poly Researh Insues (ENEPRI) publly avalable. Ths paper was prepared as par of he ENEPRI proje REVISER a Researh Tranng Nework on Healh, Ageng and Reremen whh has reeved fnanng from he European Commsson under he 5 h Researh Framework Programme (onra no. HPRN-CT ). Is fndngs and onlusons should be arbued o he auhors and no o ENEPRI or any of s member nsuons. ISBN AVAILABLE FOR FREE DOWNLOADING FROM THE ENEPRI WEBSITE ( OR THE CEPS WEBSITE ( COPYRIGHT 2006, MICHAL MYCK AND HOWARD REED

2 Tax and Benef Reforms n a Model of Labour Marke Transons ENEPRI Researh Repor No. 25/Oober 2006 Mhal Myk and Howard Reed Absra We presen a mehod for akng advanage of labour marke ransons o denfy he effes of fnanal nenves on employmen desons. The framework we use s very flexble and by mposng few heoreal assumpons allows us o exend he modelled sample relave o sruural models. We ake advanage of hs flexbly o nlude dsabled persons n he model and o jonly analyse he behavour of dsabled and non-dsabled persons. A grea deal of aenon s pad o he approprae modellng of fnanal nenves n he labour marke. In he ase of dsabled persons, akng aoun of fnanal nenves urns ou o be an exremely omplex proess bu one ha n he end urns ou o be well worh he effor. The model s used o ompare reaons n he labour marke o margnal hanges n fnanal nenves and also o model one of he mos mporan reforms of he UK Labour governmen he nroduon of he Workng Famles Tax Cred. The mehodology reles on mahng he ranson and nome daa derved from ross-seonal and panel surveys, and ould be used n oher ounres for whh dealed, relable nome daa are no olleed n a panel forma. Mhal Myk s wh he German Insue for Eonom Researh (DIW), Berln (e-mal: mmyk@dw.de) and Howard Reed s wh he Insue for Publ Poly Researh (IPPR) (e-mal: h.reed@ppr.org). Ths paper s based on he mehodology and resuls developed under wo researh projes arred ou for several UK governmen deparmens whle boh auhors were employed a he Insue for Fsal Sudes (IFS). The mehodology was nally developed under he proje alled Fsal poly and labour supply ondued for he HM Treasury, he Inland Revenue (urrenly HMRC) and he Deparmen for Work and Pensons, whle s exensons and furher resuls were developed under he proje alled Inludng dsabled persons and her parners n a dynam model of labour supply arred ou for he Deparmen for Work and Pensons. We would lke o aknowledge he fnanal suppor of all hree deparmens ha onrbued o hs researh. We would also lke o hank he vl servans nvolved n hese projes for her adve and exremely useful ommens a varous sages. Boh auhors have sne moved from he IFS; Mhal Myk s a Senor Eonoms a DIW, whle Howard Reed s he Researh Dreor a he IPPR. Mhal Myk would lke o express appreaon for he fnanal suppor provded by he REVISER proje, whh enabled he ompleon of hs fnal paper. Daa from he Famly Resoures Survey and he Labour Fore Survey used n hs paper were suppled by he UK Daa Arhve, who bear no responsbly for s analyss or nerpreaon. Mrosmulaons for he UK were ondued usng he ax and benef model TAXBEN of he IFS, o whom we are graeful for makng avalable o us. We are also graeful o our olleagues from he IFS for her suggesons and ommens durng he developmen of he projes. The usual dslamer apples.

3 Conens. Inroduon The modellng sruure Modellng he ransons of sngle persons Modellng he ransons of ndvduals n ouples Modellng fnanal nenves Fnanal nenves for persons whou dsables Fnanal nenves for dsabled persons Treamen of wages Mahng he daa of he LFS and FRS Smulang a poly hange Shor- and long-erm effes of labour marke reforms Daa for esmaon Defnon of dsably Sample seleon Employmen ransons n he LFS Resuls Regressors n he ranson models Major fndngs n he fnal spefaon of he ranson models for sngles Major fndngs n he fnal spefaon of he ranson models for ouples Smulang a poly hange usng he fnal verson of he model Conlusons Referenes Appendx Modellng fnanal nenves Benef lam senaros n TAXBEN A ake-up model for he Inapay Benef... 40

4 Tax and Benef Reforms n a Model of Labour Marke Transons ENEPRI Researh Repor No. 25/Oober 2006 Mhal Myk and Howard Reed. Inroduon Sne frs beng eleed n 997, he Labour governmen n he UK has nrodued a number of reforms o he ounry s ax and benef sysem. Sarng n 999, he sysem of n-work suppor for low-earnng famles wh hldren and for dsabled persons n work (wh or whou hldren) was reformed n a way ha made sgnfanly more generous han he prevous sysem. Table below gves deals of he man ypes of benefs and ax reds n he UK and shows he prnpal reforms beween 997 and Ths paper fouses on he effe of wha broadly mgh be alled he frs round of reforms, ourrng beween 999 and 2002 (he seond round of reforms n 2003 foused more on hanges o he admnsraon and labellng of benefs and ax reds raher han her fnanal value). More dealed nformaon on hese reforms an be found n Dkens, Gregg & Wadsworh (2003), Balls, Gre & O Donnell (2004) and Shaw & Sbea (2005). The mehodology presened n hs paper orgnaes from he work done by Gregg, Johnson & Reed (999), who developed a model of labour marke enry for he UK labour fore. The analyss aouns for labour marke dynams o a greaer exen as we model boh employmen enry and ex. Perhaps more mporanly, he mehodology offers an orgnal reamen of ndvduals n ouples n he labour marke. The oher key feaures of he model are: I reles on esmang he probably of ranson beween dfferen labour marke saes, ondonal on beng n a eran sae a year earler (hs s mplemened usng nformaon from he Labour Fore Survey (LFS), whh follows famles for fve quarerly nervews). In addon o onrollng for haraerss suh as age and famly saus, he model ondons hese ranson probables on he fnanal nenves ndvduals enouner n he labour marke. Fnanal nenves are esmaed usng he Famly Resoures Survey (FRS) and he ax and benef mrosmulaon model of he Insue for Fsal Sudes (IFS), TAXBEN. The alulaon of fnanal nenves aouns for he paral ake-up of some benefs and reas hldare oss as fxed oss of workng. Informaon on fnanal nenves from he LFS and FRS s mahed. The model nludes dsabled persons and we presen a dealed framework for modellng fnanal nenves for hs group of he workng-age populaon. Indvduals are reaed as dsabled for he purposes of he esmaon f hey repor work-lmng dsably or lam dsably benefs (or boh). In addon, here were reforms o he dre ax sysem over he perod for example, a 0% sarng rae of nome ax was nrodued over a narrow band of nome n 999, and bas-rae nome ax was redued n Payroll axes were also reformed: he sruure of Naonal Insurane onrbuons was hanged slghly o make more onssen wh nome ax and he raes were rased n 2003.

5 2 MYCK & REED Sngle persons and hose who lve n ouples are reaed separaely for he purpose of he esmaon (as s he ase wh mos sruural models). Table. Man benefs and ax reds n he UK sysem and reforms beween 997 and 2003 Benef/ax red Suaon n 997 Reforms In-work suppor for famles wh hldren n whh n-work earnngs are low Famly Cred avalable for hose workng 6 hours or more per week; lmed addonal hldare suppor hrough nome dsregard; a full-me bonus avalable for workng 30 hours or more per week; meansesed whdrawn a 70% when ne nome s above a spefed hreshold 999: Workng Famles Tax Cred (WFTC) replaes Famly Cred; s smlar n sruure bu more generous, wh a lower aper (55%) and more suppor for hldare hrough a hldare red : Generosy of WFTC gradually exended 2003: WFTC replaed by wo ax reds Chld Tax Cred (CTC) and Workng Tax Cred (WTC); generosy s smlar bu he assessmen perod for means es and sruure of benefs are dfferen Suppor for dsabled persons when ou of work: onrbuory benef Suppor for dsabled persons when ou of work: non-onrbuory benef Help wh mobly and are oss for dsabled persons Inapay Benef (IB) avalable for ndvduals who are napable of work (and sasfy a personal apably assessmen from a door); pad o hose wh suffen prevous payroll (Naonal Insurane) onrbuons, alhough hs requremen s waved n some ases; has a range of raes aordng o how long a laman has been on he benef (he rae rses over me) Inome Suppor, he man benef for persons no n work who are no expeed by he governmen o seek work owng o skness or dsably, nludes Dsably Prema (ISDP); a range of dfferen levels of he benef are payable dependng on he severy of dsably; he benef s meansesed wh whdrawal a 00% one gross nome s above a eran hreshold; many IB lamans are also elgble for ISDP as IB by self s nsuffen o floa ndvduals off he means es Dsably Lvng Allowane (DLA), payable a a range of raes for persons who requre sgnfan amouns of help n onneon wh her bodly funons or wh makng ousde journeys Clam ondons ghened a varous pons over hs perod 200: IB made parly means-esed on prvae or oupaonal penson nome Slgh hanges o elgbly rules; nreases n hld addons for Inome Suppor, bu lle hange n he generosy of Dsably Prema n real erms No major hanges over hs perod In-work suppor for dsabled persons wh low earnngs Soure: Auhors daa. Dsably Workng Allowane (DWA), wh a sruure smlar o ha of Famly Cred 999: Dsabled Persons Tax Cred (DPTC) replaes DWA; raes and sruure smlar o WFTC for he mos par 2003: In-work suppor for dsabled persons ombned wh suppor for famles wh hldren n he Workng Tax Cred (WTC) sheme; addonal prema avalable for dsabled persons

6 TAX AND BENEFIT REFORMS IN A MODEL OF LABOUR MARKET TRANSITIONS 3 Expl reamen of dsably n labour marke models s rare, and o our knowledge none of he models appled o UK daa has aemped o lnk dsably o hoes of labour marke parpaon. Early US sudes of he relaonshp beween dsably and labour marke parpaon (e.g. Parsons, 982 and Slade, 984) suggesed a very srong relaonshp beween he value of ou-of-work dsably benefs and employmen. Bound (989) argued, however, ha hese sudes exaggeraed he effe of dsably benefs. He showed ha a large proporon of he fall n employmen among dsabled persons reorded n he US would have ourred wh or whou he dsably benef sheme. Mos of he reen sudes analysng he relaonshp beween dsably and labour marke parpaon use sem- or non-sruural approahes. In some ases, so-alled naural expermens enable he denfaon of labour supply elases and responsveness for dsabled persons (Gruber, 2000 and Campole, 2003). In ohers, as for example n Harkness (993), alhough he auhors develop a sruural model, he esmaon s hen ondued n a non-sruural fashon. Neverheless, a dsnve feaure of hese models s ha he esmaons are ondued solely on dsabled persons and are herefore no drely omparable wh he non-dsabled populaon. Compared wh esmaes derved from naural expermens, he model presened here s more general and no spef o a gven poly or area of he ounry. Ths paper s organsed as follows. Seon 2 presens he sruure of he labour supply models ha we esmae. Seon 3 explans spefally how he model uses nformaon on he hanges n fnanal nenves ha ndvduals and famles fae as a resul of he benef reforms o esmae he models. Seon 4 brefly explans how he model s used o smulae he labour supply effes of hanges o benef poles. Seon 5 deals he daa we use and n parular how dsably s defned n he daa. Seon 6 presens he resuls of he labour supply model. Seon 7 onludes. 2. The modellng sruure In hs seon we presen an overvew of he whole modellng proess. In he esmaon we rely on mahng nformaon derved from wo dfferen daases (he LFS and FRS). Ths proess s desrbed n deal n seon 3.4. Whle fnanal nenves are alulaed usng he FRS, employmen ransons an only be observed n he LFS, whh s a fve-quarer, rollng panel daase. The esmaon of fnanal nenves akes no aoun he paral ake-up of several benefs, along wh modellng he benefs for dsabled persons and gvng onsderaon o he os of hldare for hose wh young hldren. These feaures of he modellng proess make he alulaon of fnanal nenves muh more aurae bu a he same me mply a greaer omplexy of he whole modellng proess. The overall proess an be dvded no four sages: ) ompuaon of expeed values for npus no he ax and benef smulaon (done usng he FRS and LFS); ) ) v) ompuaon of nomes n dfferen employmen saes and under dfferen ake-up senaros (done usng he FRS); alulaon of he fnanal nenves n dfferen employmen saes nludng he paral ake-up of benefs and hldare use (done usng he FRS for non-dsabled persons and he LFS for dsabled persons); and esmaon of labour-marke ranson models. We begn he desrpon of he mehodology wh deals of he esmaon proedures for sngle persons and ouples. In eah ase we esmae he probably of hangng he labour marke sae beween waves and 5 of he LFS,.e. n wo perods separaed by a year. The esmaed probably s hus he probably of beng n a sae of employmen a me () ondonal on he employmen sae a year earler (a me (-)).

7 4 MYCK & REED 2. Modellng he ransons of sngle persons Two separae equaons are esmaed for sngle persons: ) an enry equaon for he sub-sample of persons who were no employed n perod (-); and 2) an ex equaon for hose who were employed a (-). Le work, be an ndaor varable desrbng wheher person s employed a me (). The probably ha someone no workng eners work or he enry model an be represened as: Pr( work = work = 0) =Φ ( β X ) () ' enry,,, and he probably ha someone workng sops work or he ex model an be represened as: Pr( work = 0 work = ) =Φ ( β X ) (2) ' ex j, j, 2 j, In prae, eah ndvdual n he daa an onrbue o only one of hese wo equaons, dependng on her employmen saus a me (-). Funon Φ(.) s he normal umulave dsrbuon funon, and X enry and X ex j are veors of regressors nludng ndvdual haraerss. In our approah, he regressors nlude he haraerss of age, famly sruure, dsably saus, regon, e., plus he fnanal nenves enounered by ndvduals n he labour marke,.e. nomes n and ou of work. 2.2 Modellng he ransons of ndvduals n ouples In he model we use for ouples, we denfy nal employmen saes a he level of he ouple and no he ndvdual, and hen model ouples behavour as a bvarae hoe made by parners ndvdually bu allowng for orrelaon beween parners desons. 2 The sem-sruural approah makes no assumpons onernng he proess ha deermnes he observed dsrbuons of hours of work. The mehod s onssen wh he vew ha he desons of one member of he ouple affe and are affeed by he hoes of he oher, and represens a naural exenson of he mehodology used o model sngle ndvduals. Our modellng of ouples dsngushes among four saes a ouple an be n: ) a man workng and a woman workng (whh we refer o as a (,) ouple, o whh we assgn he parameer value D, =); 2) a man workng and a woman no workng (a (,0) ouple, D, =2); 3) a man no workng and a woman workng (a (0,) ouple, D, =3); and 4) a man no workng and a woman no workng (a (0,0) ouple, D, =4). 2 The nal mehodology was based on modellng he ouples hoe wh he mulnomal log model. The need o nlude a large se of regressors makes he bvarae prob model a more naural hoe and we would lke o hank Alan Dunan for suggesng hs approah. As Myk (2005) demonsraes, for he same se of regressors he performane of hese wo models n erms of generaed response o hanges n fnanal nenves s very smlar.

8 TAX AND BENEFIT REFORMS IN A MODEL OF LABOUR MARKET TRANSITIONS 5 The am of our labour supply model s o model he ransons of ndvduals n ouples beween hese saes ondonal on he sae a me (-). The sample s herefore dvded no four sub-samples: (,), (,0), (0,) and (0,0), and hen we model he ransons as a hoe made by eah of he parners allowng for orrelaon beween her desons. Ths means ha we esmae four separae ses of equaons for ouples n he sample. In he ase of analysng parners hoes a her ndvdual level he ranson probably for he wo parners s desrbed by he bvarae normal umulave dsrbuon funon. For example, he probably of hoosng sae ( q ) n he ase of ouples ha are n employmen sae (,0) a me (-) s: m m w w m w Pr( D, = q D, = 2) = Φ 2 ( π * X β m, π * X β w, π * π * ρ), for q =,2,3,4 (3) m w where π s f he man exs and f he does no, whle π s f he woman eners and f she does no. Veors X and X nlude ne nome varables. Φ (.) s he bvarae m w normal CDF, and ρ s he orrelaon parameer denong he exen of orrelaon beween he wo ranson equaons for men and for women. Correspondng expressons for ranson probables an be wren for he oher hree nal employmen saes. 3. Modellng fnanal nenves The frs sage of he modellng proess onsss of esmang gross wages for labour marke enrans (.e. hose who are no employed). Beause he model only dsngushes beween employmen and non-employmen we also esmae a measure of he expeed number of hours worked f employed. For persons wh hldren we also esmae he os of hldare under dfferen employmen senaros (for example, f boh parens are workng or f eher of hem s workng). Below we dsuss how fnanal nenves are alulaed for non-dsabled persons (seon 3.) and dsabled persons (seon 3.2). We mus remember here ha fnanal nenves n he ransons model (esmaed on he LFS) are mpued from he FRS by mahng group-average values of fnanal nenves for ndvduals or ouples wh he same haraerss. Seon 3.4 gves bref deals of hs mahng proedure. Seon 3. also explans how he nermedae equaons for wages, hours of work and hldare oss are esmaed Fnanal nenves for persons whou dsables For ndvduals wh dsables, he modellng of fnanal nenves s ondued almos enrely usng he FRS. The only exepon s made for he esmaon of enry wages. Ths s esmaed usng he LFS daa, n whh we an denfy persons who ener employmen beween me (-) and (). The ompuaon of fnanal nenves, boh n and ou of work, s mos sraghforward n he ase of non-dsabled persons whou hldren. To alulae fnanal nenves for hs group he FRS nformaon on demographs, asses, area of resdene, e., and requre a measure we use of gross wage and of hours of work when employed. Hours of work are esmaed on he FRS sample of workng persons usng OLS regresson on he sample of hose employed, wh regressors as shown n Table 2. The wages for he non-employed sample are mpued usng an enry-wage equaon run on he LFS enry sample. The enry-wage equaons are esmaed for men and women separaely usng OLS on he log hourly wage measure, and he regressors omprse: year dummes, a ub n age, age a whh he person lef full-me eduaon, a regonal dummy for London and he Souh Eas (whh are 2 3 Dealed resuls of he nermedae models are avalable from he auhors on reques.

9 6 MYCK & REED parularly hgh wage areas n he UK), maral saus and a dsably dummy. The prese reamen of wages n he model s a lle more omplex; we reurn o hs ssue n seon 3.3. For he momen le us jus assume ha for all ndvduals n our sample we have a measure of expeed hours of work when employed and a measure of gross hourly wage. Table 2. Regressors used for hours equaons Regressor Sngle men no hldren Sngle women no hldren Sngle parens Marred men Marred women Year dummes Cub n age Age lef fullme eduaon Regonal dummes Number of hldren Age of younges hld Dsably dummy Number of obs 9,962 8,004 3,895 29,940 25,293 Noe: ndaes use n sub-sample regresson on employed persons n he FRS Soure: Auhors daa. Usng hese measures of hours of work and gross hourly wage we an ompue nome n and ou of work for ndvdual (who does no have hldren) n he LFS sample as: Y E g = Jg Jg jg= f ( hˆ E, jg, w jg *, 0 ) ς (4) whle for a ouple (also whou hldren) as: Y E g = Jg Jg jg= f ( hˆ ˆ m m w w E, jg, w jg *, he, jg, w jg *, 0 ) ς (5) where and j ndex ndvduals n he LFS and FRS samples respevely, g ndexes a spef group and E s a spefed employmen sae. 4 For ouples ndes m and w denfy he man and he woman respevely; Jg s he number of ndvduals (or ouples) j n group g n he FRS; 4 E akes values 0 (non-employed) and (employed) for sngle persons and (sae (,)), 2 (sae (,0)), 3 (sae (0,)) and 4 (sae (0,0)) for ouples.

10 TAX AND BENEFIT REFORMS IN A MODEL OF LABOUR MARKET TRANSITIONS 7 h E, jg ˆ s a measure of hours worked n employmen sae E, whh for non-employmen akes value 0 and for employmen s a measure of expeed hours worked based on he lnear hours equaon; w jg * s a gross wage measure; ς 0 sands for he ax and benef sysem n plae a he me he daa was olleed; and he ne nome of ndvduals n he FRS s a funon f (.) of hours of work, gross hourly wages and he ax and benef sysem. The alulaon s more omplex for hose wh hldren beause aouns for ake-up of he Workng Famles Tax Cred (WFTC), he probably of hldare use and he use of hldare subsdes n senaros where a leas one person n he famly s employed. 5 Le us defne hree varaons of he ax and benef sysem: ς s a sysem wh WFTC hldare subsdes n whh everyone akes up 00% of her modelled WFTC enlemen; ς 2 s a sysem whou WFTC hldare subsdes n whh everyone akes up 00% of her modelled WFTC enlemen; and ς 3 s a sysem n whh no one akes up he WFTC. Defnng M as a veor of hours of work and gross hourly wages and Ĉ as he preded hldare os n he employmen sae E, we an defne hree measures of ne nome for famly j n he FRS: Y, ς, Cˆ E, j = q( M E, j E, j 2 Y E, j = q( M E, j, ς 2 ) ) 3 Y = q M, ) (6) E, j ( E, j ς 3 WFTC Le Pˆ be he expeed measure of WFTC ake-up,.e. a measure of probably ha he C famly lams he WFTC, ondonal on beng elgble for. Also le Pˆ be a preded measure of hldare use,.e. a measure of probably ha he famly wll use hldare n a gven employmen senaro. Then funon f (.) from equaons (4) and (5) akes he followng form: f, Cˆ ˆ C 3 ) [ ] [( ( ) * ) * ˆ WFTC ] [ ˆ * ˆ C = Y + Y + Y Y P Y P C P ] (7) ( M E, j E, j E, j E, j E, j E, j E, j E, j E, j E, j E, j The frs erm n square brakes on he rgh-hand sde s value of ne famly nome n employmen sae E n he senaro where hey do no lam he WFTC. The seond erm n square brakes s he expeed value of he WFTC, akng no aoun he value of hldare subsdes (mulpled by he probably of hldare use) and he probably of WFTC ake-up. 5 The ake-up rae for Inome Suppor/Jobseekers Allowane, Housng Benef and Counl Tax Benef s assumed o be 00% for all ndvduals n he sample. In he ase of hese benefs hs assumpon seems aepable gven ha ake-up raes for hese benefs are n he range of 80-95% (see for example Deparmen of Soal Seury, 999).

11 8 MYCK & REED The hrd erm s he expeed hldare os, gven he alulaed value of hldare weghed by he expeed probably of usng. 6 The fnal measure of ne nome for famly n he LFS s an average for he orrespondng group n he FRS n he same way as for hose whou hldren. Table 3 gves a ls of he regressors used n he dfferen hldare equaons he hldare os equaon, he equaon o deermne he hours of pad hldare among famles ha use pad hldare, he equaon o deermne he use of hldare and he equaon for he ake-up of Famly Cred/WFTC. Table 3. Regressors used for hldare hours, os and ake-up equaons Regressor Hourly hldare os Hours of pad hldare among hose who use Use of pad hldare Take-up of Famly Cred/WFTC Year dummes Cub n age Male dummy Age lef full-me eduaon Regonal dummes More han wo hldren Age of younges hld Hourly hldare os Non-employed household member Value of WFTC elgbly Works less han 30 hrs per week Number of obs 3, ,373,764 Noe: ndaes use n sub-sample regresson on employed persons n FRS Soure: Auhors daa. 3.2 Fnanal nenves for dsabled persons For hose wh dsables we add anoher sage ha allows a more prese alloaon of he major dsably benefs Inapay Benef (IB), he Dsably Lvng Allowane (DLA) and he Dsabled Persons Tax Cred (DPTC). The reason for dong so, raher han followng he 6 Dealed resuls of he hldare os and hldare hours equaons, Famly Cred/WFTC ake-up modellng and hldare-use probably models are avalable from he auhors on reques.

12 TAX AND BENEFIT REFORMS IN A MODEL OF LABOUR MARKET TRANSITIONS 9 mehodology used for modellng he WFTC (for example), s ha on he bass of he daa alone s dfful o deermne elgbly for dsably benefs. Therefore, sandard ake-up modellng mehods anno be easly appled. As we show below, n ases where ake-up modellng s neessary, he LFS onans more nformaon han he FRS. Ths exra nformaon an be used n a dsably-benef elgbly/ake-up model. Gven he ompuaonal nensy of hs mehod we apply only o he mos ommonly lamed dsably benefs: he IB, DLA and DPTC. In addon, our mehodology also ndrely models he Inome Suppor Dsably Premums (ISDP). 7 For dsabled ndvduals and for ouples wh a dsabled person, we ompue ne nomes n dfferen employmen saes n a greaer number of senaros han for hose whou dsables. 8 The senaros are deermned by mposed benef elgbly. For example, we alulae ne nomes n work and ou of work assumng ha he person reeves he DLA and assumng ha s/he does no. As a onsequene eah dsabled person n he LFS sample s assgned several nand ou-of-work measures of nome. To use he DLA example, for a sngle dsabled ndvdual whou hldren we herefore have: Y E, DLA g = Jg Jg jg= f ( hˆ E, jg, w jg *, ς ) (8) DLA 0 Y E, NoDLA g = Jg Jg jg= f ( hˆ E, jg, w jg *, ς ) (9) NoDLA 0 In he ase of he DLA, wheher nome s assgned nludng or exludng he DLA s deermned by reorded benef reep by person n he LFS daa. Sne he DLA s ndependen of employmen saus, f a person delares reep of he DLA n he daa, s/he s assgned an nome wh he benef boh n and ou of work. 7 The Inome Suppor Dsably Premum (ISDP) s an addon o Inome Suppor, whh s he man means-esed nome replaemen benef n he UK. As dsabled persons end o be poorer han he res of he UK populaon on average, he ISDP s a very ommonly lamed, means-esed dsably-relaed benef. Unforunaely, neher of he daases we use onans expl nformaon on wheher a famly reeves he ISDP as a spef omponen of s Inome Suppor or no. We only have nformaon on wheher ndvduals reeve Inome Suppor and (n he ase of he FRS) he oal Inome Suppor amoun. Sne Inome Suppor s means-esed, knowng he amoun of he benef reeved does no allow he denfaon of wheher or no someone reeves he dsably premum. The only way of mpung he reep of he premum s hrough he denfaon of anoher dsably-relaed benef on whh he ISDP s made ondonal (he so-alled qualfyng benef ). As a onsequene, he ISDP s auomaally added n he TAXBEN model for all hose who are elgble o reeve Inome Suppor and reeve a qualfyng benef. Sne he model assumes a 00% ake-up of Inome Suppor, n alulang he ne nomes n dfferen senaros he model exends hs assumpon o dsably premums for hose who lam a qualfyng benef. Boh he DLA and IB are qualfyng benefs. Therefore n our proedure of ompung nomes for dsabled persons as desrbed above, he ne nomes ou of work ha are alulaed for dsabled persons under he assumpon of reevng he DLA or IB also nlude he ISDP. 8 For deals on he employmen/benef lam senaros n whh ne nome are alulaed, see he appendx.

13 0 MYCK & REED The alloaon of he benef s slghly dfferen n he ase of IB beause elgbly for IB s dependen, among oher hngs, on beng ou of work. For ndvduals who are observed n he LFS as beng ou of work ( E = 0) a me () we use he same mehod as for he DLA. We ompue: Y E= 0, IB g = Jg Jg jg= f ( hˆ E, jg, w jg *, ς ) (0) IB 0 Y E= 0, NoIB g = Jg Jg jg= f ( hˆ E, jg, w jg *, ς ) () NoIB 0 and alloae he nome ha orresponds o he reorded IB lam. Ye, sne we also need a measure of fnanal nenves ou of work for hose who are employed a me () (and who herefore anno have a reorded IB lam), we esmae an IB ake-up/elgbly equaon on he bass of nformaon from he LFS a me (-) and (). 9 A preded ake-up/elgbly probably measure ( Pˆ ) s hen derved for all hose who are dsabled and n work a me () IB and a measure of nome ou of work s alulaed usng he preded IB ake-up probably, as follows (noe ha denfes a person n he LFS): Y E= 0, g = Y + ( Y Y ) * Pˆ (2) E= 0, NoIB, g E= 0, IB, g E= 0, NoIB, g IB Our alulaons of nome ou of work also aoun for he possbly of jon reep of he IB and DLA. For hose who are ou of work wh reorded IB and DLA reep we alloae: Y E= 0 g Jg = f ( hˆ Jg jg= E, jg, w jg *, ς ) = Y (3) DLA+ IB 0 E= 0, DLA+ IB g whle for hose n work a me () wh a reorded reep of he DLA we alulae nome ou of work as: Y = Y + ( Y Y ) * Pˆ (4) E= 0 E= 0, DLA, NoIB E= 0, DLA+ IB E= 0, DLA, NoIB Beause he DPTC s an n-work benef s only alloaed o nomes n he n-work senaros ( E =). Group level nome wh he DPTC s alulaed as: IB Y E=, DPTC g = Jg Jg jg= f ( hˆ E, jg, w jg *, ς ) (5) DPTC 0 Ths measure of nome s alloaed o persons who work a me () and are reorded as lamng he DPTC n he LFS. We also alloae hs measure of nome for he n-work senaro o ndvduals who are ou of work a me () and who are reorded as reevng he IB. Those who eher work and reeve boh he DLA and he DPTC or are no workng and reeve he IB and he DLA are assgned nome wh he DPTC and he DLA as nome for her nwork senaro. 9 Deals of he esmaon are presened n he appendx.

14 TAX AND BENEFIT REFORMS IN A MODEL OF LABOUR MARKET TRANSITIONS A smlar mehodology s used when alulang he fnanal nenves for ouples, bu reognses ha here are more possbles wh regard o who reeves parular benefs. 0 For dsabled persons wh hldren he same mehodology s appled bu n lne wh he alulaon for non-dsabled persons we alulae nomes under he hree varaons of he ax and benef sysem ( ς, ς 2, ς 3) defned n seon 3., makng dfferen DLA, IB and DPTC lam assumpons. 3.3 Treamen of wages One of he key deermnans of fnanal nenves o work s he gross hourly wage. The model requres us o alulae fnanal nenves o work for hose who are observed n work (and herefore for whom we know he aual hourly wage) and for hose who are no. In he laer ase, a wage predon s needed. The approah we use o model wages s o use aual wages for persons wh observed wages, and for hose whou o negrae ne nomes n work over he dsrbuon of he resdual. Ths reamen ensures ha wages for hose wh and whou observed wages are drawn from he same ondonal dsrbuons. I leads o esmang ranson models for non-workers (and for ouples wh a leas one non-workng parner) usng smulaed maxmum lkelhood esmaon mehods. Smulang he lkelhood funon In he ase of he enry prob model he smulaed lkelhood funon we esmae s: ln L = I ln K K = k = Φ( q * X, ϖ k β ) (6) where ndexes ndvduals n he LFS enry sample and, k s a veor of ndvdual haraerss and nludes a measure of nome n work based on he wage measure ϖ k usng he k h draw from he wage dsrbuon. Here q akes value f he person eners and ( ) f he person does no ener. Smlarly we an derve a smulaed lkelhood funon for he bvarae prob esmaon for ouples. Usng he example from equaon (3) n he bvarae prob spefaon we esmae he followng log lkelhood funon: ln L X ϖ ϖ (7) n K m m w w m w (,0) = ln Φ 2 ( π * X j, k β m, π * X j, ϖk βw, π * π * ρ) j= K k = m w where π s f he man exs and f he does no, whle π s f he woman eners and m w f she does no. Veors X j, ϖ k and X j, ϖ k nlude ne nome varables and ϖk ndaes he k h draw from he enry wage dsrbuon. Smlar smulaed lkelhood funons an be derved for (0,) and (0,0) ouples. For he ex model and for (,) ouples we do no need o use he smulaed lkelhood esmaon sne we use observed wages o alulae nomes n work. 0 See he appendx for deals. Agan, for deals see he appendx.

15 2 MYCK & REED In he example where only he man s workng a me (-) ne nomes alulaed for he (0,) and (,) senaro are based on he aual wages of he man and on he woman s wages drawn from he ondonal wage dsrbuon. Ne nomes are alulaed k mes on he bass of k ndependen draws from he wage dsrbuon. For ouples (0,0),.e. hose n whh neher of he parners are employed a me (-), we draw ndependenly from he dsrbuon of men s and women s wages k mes and alulae ne nomes a he ouple level for dfferen senaros for k pars of wages Mahng he daa of he LFS and FRS In mahng he nome nformaon from he FRS wh ha n he LFS we have followed he mehod appled n he orgnal labour-marke ransons proje (Gregg, Johnson & Reed, 999). Ths reles on averagng nomes n groups defned by eran observable haraerss n he FRS and alloang hese averages o orrespondng groups n he LFS. The groupdefnng haraerss have been adjused o ake aoun of dfferen age rera and of dsably saus. Groupng s done exlusvely whn dfferen employmen saus groups (.e. employed and non-employed for sngles and he four employmen saes for ouples defned by he employmen saus of he parners). Sngle persons are grouped by he followng haraerss: daa year, by four years ( o ) gender, by wo groups age, by fve age groups 20-24, 25-36, 37-50, 5-54 and (women)/64(men) eduaon, by hree groups lef shool aged <7, lef shool a 7-8, lef shool a 9+ resdene, by wo groups eher lvng n London/Souh Eas or no hldren, by hree groups no hldren, one or wo hldren, hree hldren or more age of he younges hld, by wo groups have a hld aged 0-4 or no dsably, by wo groups dsabled or no dsabled. For ouples he followng haraerss have been used o group he daa: daa year, by four years ( o ) age of he man, by fve age groups 20-24, 25-30, 30-36, 37-44, and age of he woman, by four age groups for (,) ouples 20-32, 33-44, and 55-60; by hree age groups for oher ouple ypes 20-32, and eduaon level, by fve groups for (,) ouples: ) boh parners lef shool aged 9+; 2) he man lef shool aged 9+ and he woman aged <9; 3) he woman lef shool aged 9+ and he man aged <9; 4) he man lef shool aged 7 or 8 and he woman aged <9; and 5) he man lef shool aged <7 and he woman aged <9; by four groups for oher ouple ypes: ) boh parners lef shool aged 9+; 2) eher of he parners lef shool aged 9+; 3) eher of he parners lef shool aged 7 or 8 bu no one lef shool aged 9+; 4) boh lef shool aged <7 resdene, by wo groups eher lvng n London/Souh Eas or no 2 Noe ha n hs ase we would deally wan o use a double-negral over wage dsrbuons of he man and he woman. Ths s done for example n van Soes s (995) sruural model. Suh an approah would, however, requre k 2 number of fnal ne nomes for (0,0) ouples. Gven he already hgh ompuaonal nensy of he model we deded o draw pars of wages only k mes.

16 TAX AND BENEFIT REFORMS IN A MODEL OF LABOUR MARKET TRANSITIONS 3 hldren, by hree groups no hldren, one or wo hldren, hree hldren or more age of younges hld, by wo groups have a hld aged 0-4 or no dsably, by wo groups eher of he parners s dsabled or none of he parners dsabled. 4. Smulang a poly hange The mehodology developed n hs paper s nended as a ool for poly analyss n whh he key area of neres s he smulaon of he employmen effes of hanges o axes and benefs. In seon 6 we presen he resuls of smulang he effes of he nroduon of he WFTC n 999, holdng all oher aspes of he ax and benef sysem onsan. The poly smulaon nvolves he followng sages: ) alulang expeed ranson probables (for example from non-employmen o employmen) usng he orgnal fnanal nenve varables on whh he model s esmaed (.e. usng he base ax and benef sysem); ) replang he fnanal nenve varables wh nenves alulaed usng a reformed ax and benef regme (.e. nenves afer he nroduon of a reform, suh as he WFTC) and alulang he expeed ranson probables usng he new fnanal nenve varables; and ) wh he wo ses of expeed ranson probables, alulang he expeed number of ndvduals n varous employmen saes under he wo regmes. The dfferene beween hese s he employmen effe of he smulaed reform. Usng he esmaed model oeffens from he ranson equaons we produe a veor of preded probables orrespondng o poenal employmen saes for eah benef un: ˆ E E Π ( X, Y ( ς, w *, hˆ )) (8) B B E where X s a veor of ndvdual haraerss nluded n he model and Y B s a veor of nomes n E employmen saes for ndvdual/ouple (for whom we preded employmen hours ĥ and wages w * (wo of hese n he ase of ouples)) usng he base ax sysem ς B. Suh a veor of probables an also be alulaed usng fnanal nenves from he reformed ax and benef sysem, ς : R B ˆ E E Π ( X, Y ( ς, w *, hˆ )) (9) R R The dfferene n hese preded probables beween he base and reform ax and benef sysems represens he effe of he reform on hs parular ndvdual/ouple. The effe of he reform on ranson probables an be represened as: where Πˆ j E = j s zero. Πˆ E B.. E Π ˆ B = j = J Πˆ E R.. E Π ˆ R = j = J R Πˆ. =. Π ˆ E= j E= J (20)

17 4 MYCK & REED These sample-level esmaes are hen grossed up o he populaon level usng FRS grossng faors, whh are mahed o he LFS n he same way as fnanal nenves. Ths proedure ompensaes for any aron n he LFS sample. 4. Shor- and long-erm effes of labour marke reforms The nal resuls from he poly smulaon gve he preded hanges n ranson raes beween labour marke saes over he same perod ha he daa s aken from,.e. over one year, from he s o he 5 h quarer of he LFS. These resuls are unlkely o be omparable wh smulaons from sruural models sne unlke he laer hey are unlkely o orrespond o long-run equlbrum effes of poles. The mos naural noon of equlbrum n our ransons approah s ha of a sae n whh he number of persons enerng and exng employmen s he same. Usng hs defnon we an derve suh labour marke equlbrums under base and reform fnanal nenve levels and he dfferene n employmen levels beween hese ould be reaed as he full equlbrum poly effe. Ths approah reles on wo assumpons: ) ha equlbrum an be generaed as a resul of a Markov ranson proess,.e. ha he observed ranson raes beween employmen saes n he mos reen perod of he nal daa are equlbrum raes, suh ha n he absene of hanges o fnanal nenves, hey would perss ndefnely no he fuure (and are no affeed by moves of ndvduals n and ou of employmen); and 2) ha hanges n fnanal nenves ndued by poly hanges wll produe a permanen hange n ranson raes. The Markov ranson-proess assumpon s raher srong, as mples ha omposonal hanges do no affe he ranson raes. Neverheless, as an be seen n he poly smulaon presened n seon 6.4 (and as oher smulaons usng he model onfrm), he equlbrum s reahed very qukly (afer only abou 5-6 eraons), whh n our vew makes he assumpon weaker and jusfes our approah. The remander of hs seon shows how hese assumpons an be used o derve long-run equlbrum soks of persons n dfferen labour marke saes, and he effes of hanges n fnanal nenves on hose long-run soks. 4.. Calulaons for sngle persons s W, he sok of non- Denong he (grossed up) sok of workng sngle persons a me as s U workng persons as and he oal sok of (workng age) sngle persons as s N, hanges n he soks of he employed and non-employed over eah me perod are apured by he formulae: s s s W W ( Pr( ex ))) + ( U Pr( ener )) (2) + = ( + + s s s U U ( Pr( enry ))) + ( W Pr( ex )) (22) + = ( + + where Pr( ex + ) s he probably ha a person who s sngle leaves work by me (+) ondonal on her beng n work a me (), and Pr( enry + ) s he probably ha a sngle person eners work by me (+) ondonal on her no beng n work a me (). If we assume ha he oal workng age populaon of sngles, N, s sable over me, we an defne long-run s

18 TAX AND BENEFIT REFORMS IN A MODEL OF LABOUR MARKET TRANSITIONS 5 s s s s s equlbrum employmen as W = W + k = W*, for all k, and lkewse for U * and N *. The probables of enry and ex, Pr( enry *) and Pr( ex *), are also onsan over me n hs equlbrum. The long-run soks an be alulaed aordng o he formula: whh rearranges o: s s s s W* = ( W* ( Pr( ex* ))) + (( N* W* ) Pr( enry* )) (23) W s * s N* Pr( enry* ) =, (24) Pr( ex ) Pr( enry ) * * wh s s s U * N* W* =. In he poly smulaon, a ax and benef reform R produes a new se of enry and ex R R predons (all hem Pr( enry * ) and Pr( ex * ) ). These are plugged no equaon (25) o produe new long-run employmen predons Calulaons for ouples For ouples, he formulae are more omplaed owng o he fa ha we are analysng ransons o and from four labour marke saes raher han wo, bu he bas prnple s he same. Denong he soks a me () as WW = sok of ouples wh boh parners workng; WU = sok of ouples wh a man workng and woman no workng; UW = sok of ouples wh a man no workng and woman workng; UU = sok of ouples wh boh parners no workng; and he oal ouples populaon as N = WW + WU + UW + UU, we have four ranson probables from eah orgnal employmen sae E : 3 Pr( WU + E Pr( UW + E Pr( UU + E ) ) ) Pr( WW + E ) (25) 3 In he bvarae prob eah of hese probables s derved from he ndvdual ranson probables of he wo parners.

19 6 MYCK & REED Usng hs noaon, he number of wo-earner ouples a me (+) an herefore be alulaed as n he equaon: WW + = ( WW + ( UW (Pr( WW Pr( WW + + WW UW )) + ( WU ) + ( UU Pr( WW Pr( WW + + WU UU ) ) + (26) where he frs erm on he rgh-hand sde s he number of ouples who reman wo-earner ouples a me (), he seond and hrd erms are he number of ouples movng from one earner o wo-earner ouples, and he hrd erm represens he number of ouples movng from no-earner o wo-earner ouples. In a smlar way we an alulae he number of ouples a me (+) n eah of he four employmen saes. For he long-run hanges, he noaonal onvenons for he soks are as for sngle persons, e.g. WW = WW + k = WW*. The equlbrum ranson probables are denoed as Pr * ( WW UU ) = Pr( WW + k + UU + k ) for all k, and lkewse for all 6 ranson probables. The equaons for he long-run soks for he example of wo-earner ouples are: WW * = ( WW * + ( UW * Pr ( WW WW )) + ( WU * * * Pr ( WW UW )) + ( UU * Pr ( WW WU )) + * * Pr ( WW UU )) (27) and smlarly we an derve he long-run equlbrum soks for he oher employmen saes. The fa ha here are four labour marke saes nvolved for ouples nsead of he wo ha we have for sngles means ha he long-run soks of ouples n eah labour marke sae anno be drely ompued analyally; however, s easy o alulae he long-run equlbrum soks eravely Esmang he sgnfane of he employmen effes usng a boosrap proedure From he pon of vew of he poly-maker s mporan o know wheher he smulaed employmen effes are sasally sgnfan one we aoun for he preson of esmaon. We do hs by boosrappng he smulaed employmen response. Eah esmaon resuls n a veor of oeffens βˆ and an esmae of he varane-ovarane marx Ωˆ. To aoun for he preson of esmaon, he smulaons need o use no only he mean values of βˆ, bu also he nformaon onaned n Ωˆ. Smulaon boosrappng reles on repeang he reform smulaon K number of mes (where K s a leas several hundred), eah me wh a dfferen k se of oeffens βˆ, where ˆ k β = ˆ β + ε (28) Ωˆ k k Eah βˆ s a sum of he esmaed veor of oeffens and a veor of esmaon errors drawn wh replaemen from he esmaon error dsrbuon wh mean zero and varaneovarane marx Ωˆ. Wh a large number of draws from hs dsrbuon and a orrespondng number of smulaons, he dsrbuon of smulaed employmen response wll allow he deermnaon of onfdene nervals on he smulaons and denfy he sasally sgnfan effes.

20 TAX AND BENEFIT REFORMS IN A MODEL OF LABOUR MARKET TRANSITIONS 7 5. Daa for esmaon The modellng proess reles on he use of wo daases: he LFS he FRS. Ths seon presens some nformaon on he daases and he bas desrpve sass. We begn wh he desrpon of he defnon of dsably used n hs sudy and he omparson of dsably nformaon as repored n he wo daa soures. 5. Defnon of dsably We rely on wo soures of daa on dsably o denfy dsabled persons. These are: ) daa on self-repored work-lmng dsably saus; and 2) daa on he reep of any dsably-relaed benefs. Defnng dsably n hs way ensures ha: The defnon s onssen aross he wo daases boh daases nlude quesons on work-lmng dsably and on benef lam. Informaon on whh he dsably defnon s based does no drely relae o employmen saus, so he defnon overs hose n and ou of work. The dsabled defned n hs way nlude all lamans of dsably benefs; hs s mporan from he perspeve of reform smulaons and ensures ha any modelled reform o dsably benefs wll only affe ndvduals who are defned as dsabled n he model. Table 4 presens some bas nformaon on he proporon of dsabled persons n he FRS and he LFS. Dependng on he daase and he prese defnon, hs proporon vares beween abou 6% and 8%. Table 4. Dsabled persons n he LFS and FRS samples (%) Daa year Share of persons who repor lmaons onernng he amoun or ype of work hey do...and/or lam dsably benefs FRS sample LFS sample FRS sample LFS sample Toal Soures: Auhors alulaons on he bass of he FRS o and he LFS Sprng 999 o Wner 2002 (only he fnal wave from eah survey); omplee samples; fsal (FRS) years orrespond o waves: sprng-wner n he LFS. Turnng o he daa on benef reep, we would expe ha sne he elgbly rera for all dsably benefs nlude a form of dsably es, mos ndvduals lamng dsably benefs would have lmaons n erms of he ype or amoun of work hey an do. Ths s no always he ase, however. Havng a dsably benef lam does no always orrespond o an affrmave answer o quesons onernng work lmaons. To ensure he onsseny of he sudy s defnon of dsably we hus exend our defnon of dsably o also nlude he benef lamans who say hey are no lmed n he amoun or ype of work hey an (ould) do. The dfferene beween olumns 2 and 4 (for he FRS) and olumns 3 and 5 (for he LFS) n

21 8 MYCK & REED Table 4 s he proporon of persons who lam a dsably benef and ye do no delare worklmng dsably n he FRS and LFS samples respevely. Self-repored dsably may be problema owng o he endogeney of he response o hs queson wh respe o labour marke saus, as doumened n earler work on hs ssue (e.g. Parsons, 982 and Bound, 99). From a purely analyal pon of vew, would have been beer o use an objeve measure of dsably, based for example on a medal es, bu suh nformaon does no exs n he daa avalable o us. Neverheless, he quesons on whh we base he dsably defnon are asked of all surveyed ndvduals and are no drely lnked o work saus. Moreover, as we saw above, he modellng of dsably-relaed fnanal nenves s largely based on he dsably-benef lam nformaon aually repored n he daa, whh should ensure ha he fnanal nenves arsng hrough dsably-relaed benefs and ax reds are handled orrely n he modellng proess. 5.2 Sample seleon The followng seleon rera have been appled o he LFS and FRS samples. In he LFS and he FRS we exlude: full-me sudens; observaons wh key nformaon mssng or nonssen; he self-employed; ndvduals aged less han 20 and more han 55; 4 and ndvduals who hange her maral/o-habng saus beween mes (-) and () n he LFS panel. The FRS daa overs he years o Correspondng o hs s an LFS daase from sprng 998 o wner In he LFS we only use he observaons for whh we have nformaon from wave (orrespondng o (-) n he model) and wave 5 (orrespondng o () n he model). 5.3 Employmen ransons n he LFS One of he key ssues addressed n hs paper s he examnaon of employmen ransons by dsably saus. Here we presen enry and ex raes from he LFS for hose who are and who are no dsabled a me (-) by maral saus, gender, age and wheher or no hey have hldren. Noe ha a hs sage hs s purely desrpve. The LFS daa presened n Table 5 onfrm ha ndvduals who are dsabled are less lkely o ener he labour marke f hey are no employed and are more lkely o ex a year afer beng observed as an employee. The enry rae among dsabled women s four mes lower han among non-dsabled women, and dsabled men are egh mes less lkely o ener work han nondsabled men. Ex raes are abou hree mes hgher for dsabled persons han for non-dsabled persons. Ex raes of men are lower for hose lvng n ouples, whle enry raes are slghly hgher for sngle men han for hose lvng n ouples. Enry raes are hgher for sngle women han for women n ouples. Havng a hld redues enry and nreases labour marke ex. As 4 Age resrons are slghly dfferen for he nermedae models, whh also nlude ndvduals over he age of 55 and sll of workng age (.e. younger han 64 for men and 60 for women). Ths mproves he denfaon of he models. Inludng ndvduals lose o reremen age makes he denfaon of he effe of fnanal nenves on ransons very dfful, gven ha he FRS does no allow us o model he fnanal nenves ndvduals enouner o rere early (beause, for example, onans lle nformaon on he prospeve penson arrangemens of hose who are no rered).

22 TAX AND BENEFIT REFORMS IN A MODEL OF LABOUR MARKET TRANSITIONS 9 far as age effes are onerned, s generally he ase ha labour marke mobly redues wh age ndvduals n hgher age groups have a lower probably of enerng and lower probably exng. Table 5. Enry and ex raes by gender, age, famly haraerss and dsably saus (%) Ex Toal Men Women Overall ex rae Age group Age group Age group Dsabled Non-dsabled Sngle ndvduals Indvduals n ouples Have hldren Enry Overall enry rae Age group Age group Age group Dsabled Non-dsabled Sngle ndvduals Indvduals n ouples Have hldren Soure: Auhors alulaons on he bass of he LFS Sprng 999 o Wner 2002 (panels sarng from sprng 998 o sprng 999 and endng a wner 200 o wner 2002). 6. Resuls In hs seon we presen deals of he esmaon and smulaon resuls from wha we judge o be he bes spefaon of he model. The resuls nlude boh he sngles and he ouples models and smulaons are ondued separaely for sngles and ouples and hen jonly for he whole sample (see seon 4.2). As above we ondu a smulaon boosrap o hek he sasal sgnfane of he preded employmen effes. To aoun for he dsably saus of ndvduals n he sample he models nlude a se of dsably onrols. Ths s mporan o beer undersand how dsably affes employmen bu also o mnmse he effe of endogeney of dsably saus wh respe o employmen. We allow for dfferen responses o fnanal nenves by non-dsabled persons whou hldren, non-dsabled persons wh hldren and he dsabled.

23 20 MYCK & REED Gven beer denfaon and hgher preson of he esmaed oeffens and of he smulaed employmen effes we mpose a pror resrons n erms of whh fnanal nenve varables ener he model. Eah parner s enry and ex an be drely nfluened solely by nome n he (-) employmen sae and n he sae n whh s/he an move, assumng he oher parner remans n he orgnal sae. Indrely, however, he move s also deermned by he fnanal nenves he oher parner faes n he alernave o whh s/he an move beween (-) and (). In seon 6. we presen a ls of varables nluded n he regressons for sngle persons and ouples. A summary of he resuls s presened n seon 6.2, whle he appendx onans deals of he esmaons. Fnally, n seon 6.3 we presen he resuls of poly smulaons usng he model. The smulaons nlude an exerse whereby we smulae he employmen response o a small ne nome hange (he same for all ndvduals and ouples). Ths falaes greaer undersandng of he sensvy of varous groups of ndvduals o hanges n fnanal nenves ha are mpled by he model. Gven he nonlnear naure of he models, he degree of hs sensvy s dfful o judge purely on he bass of esmaed oeffens or margnal effes. As noed n he nroduon, he poly reform we hoose o smulae usng our model s he nroduon of he WFTC. 6. Regressors n he ranson models For sngle persons we nlude fnanal nenve varables n he form of logarhms of preded nome n work and ou of work. Inome measures are spl no separae regressor varables n order o allow dfferenal effes of fnanal nenves by hree aegores of ndvduals: dsabled persons (denoed as D n he resuls presened n Tables 7-0); non-dsabled persons wh hldren (denoed as C, ND); and non-dsabled persons whou hldren (denoed as NC, ND). Apar from he fnanal nenve varables, he preferred spefaon for sngle ndvduals uses he regressor varables lsed n Table 6. I s mporan o sress here ha, followng Gregg, Johnson & Reed (999), we exlude eduaon onrols from he ranson models. Ths deson follows from dffules nvolved wh denfyng he model when eduaon nformaon eners ranson equaons, whh mos probably derves from a very hgh orrelaon of ne nomes and eduaon level. Ths n a sense mples an exluson resron. Eduaon n he model deermnes he fnanal nenve varables, bu s hen assumed no o affe ransons. The same assumpon was made n he orgnal Gregg, Johnson & Reed (999) model. The models for ouples nlude essenally he same onrol varables as hose lsed n Table 6, bu n he ase of eah parner s equaon n he bvarae prob we nlude onrols for he haraerss of he oher parner. For example, n eah of he equaons we onrol for he age and he dsably saus of boh he man and he woman. In eah equaon we have a varable for he ne nome n he employmen sae a me (-) and hen ne nome n he employmen sae ha resuls from he enry or ex of he respeve parner. Beause we allow for dfferenaed responses o fnanal nenves (as n he sngles model), eah equaon onans sx fnanal nenve varables.