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The effect of minimum wage changes on labour supply and income
The effect of minimum wage changes on labour supply and income distribution Hielke Buddelmeyer and Guyonne Kalb Melbourne Institute of Applied Economic and Social Research University of Melbourne Abstract This paper uses the Melbourne Institute Tax and Transfer Simulator (MITTS) model to estimate the labour supply response that would follow an increase in real terms in the Federal Minimum Wage (FMW). In addition, the effect on income distribution is investigated. In order to put the effect in context, the increase in net household incomes following the FMW increase is returned to households via policy changes to income taxation and/or social security payments at the same total cost. Since all policy changes discussed in this paper imply the same overall increase in net income for households, the effects on labour supply and income distribution arising from these latter policy changes can be compared to the effect of the increase in the FMW. 1. Introduction The aim of this exploratory study is to provide a first estimate of the labour supply effect arising from an increase in the Federal Minimum Wage (FMW), using the Melbourne Institute Tax and Transfer Simulator (MITTS) model. Specifically, it simulates the change in labour force participation, the change in average hours of labour supply and the resulting effect on inequality that would follow an increase in the FMW. Although microsimulation modelling is not often used in analysing or predicting the effects of a change in the FMW, a recent exception is Müller and Steiner (2008), who examined the effect of introducing a minimum wage in Germany. However, they do not allow for labour supply responses, nor for effects on employment. Their simulation results showed that the minimum wage would be rather ineffective in reducing poverty, even if it led to a substantial increase in hourly wages at the bottom of the wage distribution, and had no negative employment effects. They conclude that the ineffectiveness of a minimum wage in Germany is mainly due to the existing system of means-tested income support. This analysis is a first step, which at this stage does not incorporate any sensitivity checks; rather, it is meant to provide a first calculation of the expected effect. In order to achieve this, we simulate an increase in wages received by employees currently on, or near, the FMW and an increase in offer wages received by people out of the labour force for those whose imputed wages are close to the FMW. We estimate the labour supply response to this increase in the FMW in terms of their participation rate and average hours of labour supply. We differentiate between the labour supply responses of different demographic groups of FMW earners, that is, partnered males and females, single males and females, and single parents. We estimate the implications for the overall distribution of income (in terms of household equivalised income) in the Australian population as measured by the Gini coefficient, while allowing for the labour supply responses. Finally, to put the effect in context, the increase in net household incomes following the FMW increase is returned to households via two alternative policy changes to income taxation and/or social Disclaimer: The contents of this paper are the responsibility of the authors and do not necessarily represent the views of the Australian Fair Pay Commission or the Melbourne Institute. page 211 The effect of minimum wage changes on labour supply and income distribution security payments at the same total cost. Since the three policy changes imply the same overall increase in net income for households, the effects on labour supply and income distribution arising from the two alternative policy changes can be compared to the effect of the increase in the FMW. The modelling in this paper only predicts labour supply effects, that is, the amount of hours per week that individuals want to work (desired hours of work). Changes in labour supply do not necessarily equal changes in actual employment. An important assumption in the calculation of changes in government expenditure (arising from an increase in the FMW or one of the alternative policy changes) in this paper is that labour supply is assumed to remain unchanged at the observed hours worked. This means that in our case the reduction in government expenditure due to the FMW increase (assuming unchanged labour supply) may be overestimated if an increase in the FMW would reduce labour demand. Alternatively, it may be underestimated if the increased labour supply following an increase in the FMW is met by sufficient labour demand, for example in a tight labour market. The report is organised in the following way. In order to understand what a simulation using MITTS involves and to assist in the interpretation of results, a basic understanding of MITTS and some core data issues surrounding the identification of workers at or near the FMW is required. A brief discussion of these and references to more detailed descriptions are provided in Sections 2 and 3. Section 4 discusses the microsimulation results, computing a predicted cost of increasing the FMW, examining labour supply responses and distributional impacts. A brief conclusion is provided in Section 5. 2. MITTS in brief The purpose of this section is to provide a brief background into the general structure of MITTS in a non-technical basic description. A more detailed description is provided in Appendix A, while certain aspects such as those related to the data used by MITTS are discussed specifically in Section 3. MITTS is a behavioural tax microsimulation model which allows detailed examination of the potential effects of policy reforms to the tax and transfer system on government direct tax revenue and expenditure.1 Only policy changes which affect financial incentives for individuals can be studied within MITTS. It consists of a static component that calculates 'day-after' effects of changes to the tax and transfer system assuming no changes in labour supply occur (MITTS-A), and a behavioural component that allows households to adjust their labour supply decisions (MITTS-B). MITTS incorporates nearly all Australian tax and transfer rules and calculates net incomes for individual households based on detailed wage, labour supply, other income, and household composition information. Under MITTS-A, results are calculated by comparing a base system, usually the current tax and transfer system in a policy advice context, to a reform system while assuming individuals work the same amount of (observed) hours under both systems ('day-after' effects). Under MITTS-B, this assumption is relaxed and individuals re-optimise their work and leisure decision under a new set of financial incentives in the reform system. Here, we provide a brief non-technical outline of the labour supply modelling underlying the labour responses. More information on the labour supply modelling is provided in Section 5 and Appendix B. 1 For further details of the MITTS model see Creedy et al. (2002, 2004) or for details on microsimulation modelling more generally, see Creedy and Kalb (2006). page 212 The effect of minimum wage changes on labour supply and income distribution The predicted hours of work decision is based on a labour supply model, which has been estimated separately for couples, single men, single women, and single parents. In this model, individuals (and couples) choose from a fixed number of possible hours of work/ leisure. At each hours of work point, the amount of leisure (including home production time) is known by definition, since leisure and labour supply are complements adding up to total time available. Since wages, household composition and other income are known, and MITTS incorporates the full detail of the Australian tax and transfer system, net incomes can be calculated at each hours of work point. Individuals trade off net income and leisure with the goal of maximising their household's utility. Using historical data on individuals' choices regarding this trade-off, the parameters of this labour supply model are estimated such that they best predict individuals' actual labour supply choices, given a set of individual and household characteristics. These characteristics, such as age, account for differences in preferences for net income and leisure between individuals. MITTS-B combines the estimated parameters of this model with net incomes at each hours point, allowing it to predict the probability that a particular point maximises the individual's (or couple's) utility. In other words, MITTS-B assigns each hours point a probability that it will be chosen. Expected labour supply is defined as the sum of the hours of work at the different hours points, weighted by the probabilities that the points will be chosen. With a change in the tax and transfer system, net incomes at each hours point change. As a result, the probability at each point of being chosen changes, and hence expected labour supply changes. Based on the expected labour supply changes, potential savings or additional costs (compared to the 'day-after' results under MITTS-A) are calculated. Under the pre-reform tax and transfer system, we can predict labour supply by computing expected hours of work as described above, but actual labour supply is observed as well. MITTS-B offers the choice of either predicting and comparing expected labour supply pre- and post-reform, or calibrating pre-reform labour supply to the observed hours. In the latter case, post-reform labour supply is predicted conditional on observed pre-reform labour supply. In the specific case considered in this report it is not a change to the tax and transfer system that is of interest, but an increase in the FMW. However, since an increase in wages affects net incomes at all labour supply points, the process that drives the labour supply response is as described above. Validating results predicted by the behavioural component of MITTS ex ante is complex, since isolating effects of specific policy changes ex post can be extremely difficult, given the large number of changes usually occurring at the same time. We have recently undertaken comparisons of the effects for single parents of the Australian New Tax System introduced in July 2000 as predicted by MITTS and the effects predicted by a quasi-experimental evaluation approach (Cai et al., 2008). Only a few other studies have attempted validation of microsimulation results by making this type of comparison using different evaluation approaches (for example, Blundell and Hoynes, 2004; Blundell et al., 2004, Brewer et al., 2006). Overall, they find that the direction and the magnitude of predicted effects are quite similar. Similar conclusions were drawn by Doiron (2004). She compared the results from her evaluation study of the late 1980s changes to payments for single parents to the effects of comparable (but not the same) changes to the tax and transfer system, as published in Duncan and Harris (2002) and Creedy, Kalb and Kew (2003). She found that the quasi-experimental evaluation approach seemed to estimate similar but somewhat larger effects than obtained from behavioural microsimulation for comparable hypothetical policy changes. page 213 The effect of minimum wage changes on labour supply and income distribution The labour supply responses are driven by the underlying labour supply modelling in MITTS. The wage elasticities implied in these models can be compared to other elasticities published in the literature. The implicit labour supply elasticities in MITTS are similar to those generally found within the international literature. The results for single parents and for married and single men and women are well within the range of results usually found, although admittedly this range is quite wide. A detailed comparison of elasticities arising from MITTS with elasticities from other studies is provided in Buddelmeyer, Creedy and Kalb (2007: pp. 21–4). The use of MITTS for this paper is somewhat different from how MITTS would usually be used. Instead of comparing a base system of taxes and transfers to a reform system, we aim to simulate what would happen under the current tax and transfer system if changes were to be made to the FMW. An important note to make is that MITTS is a partial equilibrium model predicting changes to labour supply only. In this paper, it means that the FMW change is assumed to have no effect on the demand for labour. In fact, it is assumed that there will be enough demand to meet any additional supply of labour due to the FMW increase. 3. Data issues 3.1 The data of analysis The input for the MITTS model is based on the Australian Bureau of Statistics' (ABS) Survey of Income and Housing Costs (SIHC). The most recent available sample of households in MITTS represents the Australian population in 2003/2004.2 Financial information for this population can be updated to a more current date, as can the tax and transfer system. However, the characteristics in the sample remain representative of the population in 2003/2004. Wages are updated with the gender-specific Average Weekly Earnings (AWE) index, and other incomes are updated with the Consumer Price Index (CPI). Both the gender-specific AWE and the CPI are published in ABS publications (ABS, 2008a, b). MITTS-A and MITTS-B results are based on all individuals in the SIHC, but under MITTS-B some individuals are assumed not to change their labour supply decision, i.e. they are fixed at their observed labour supply levels. This group consists of: • individuals who are self-employed; • individuals over 65 years of age; • full-time students; and • individuals who are disabled (as reflected by receipt of a disability pension or because they report that they are temporarily or permanently unable to work). These four groups are assumed to remain at their observed labour supply, because they are expected to behave differently from other individuals of working age, and to be less responsive to financial incentives. This is discussed in more detail in Section 5. 3.2 Definition of wages The hourly wage variable used in MITTS is total employee income divided by usual total hours. More specifically, hourly wages are calculated as 'total current weekly employee 2 We plan to update MITTS with the SIHC 2005/2006 data. page 214 The effect of minimum wage changes on labour supply and income distribution income' (the variable IWSUCP) divided by 'number of hours usually worked per week in main and second jobs' (the variable IHRSWKACP). Predicted wages are calculated for each individual using a wage model as described in Kalb and Scutella (2002). When hourly wage information cannot be derived directly from the SIHC data, predicted wages instead of observed wages are used to predict labour supply. This is always the case for individuals not working, but it also occurs for employed individuals when IWSUCP or IHRSWKACP are not available. As described above, wages are predicted in order to obtain wages for those currently not in work. This is described in detail in Kalb and Scutella (2002), and has recently been updated in Kalb and Lee (2008). In short, the SIHC data from 1999/00, 2000/01, 2002/03 and 2003/04 are pooled and used to estimate a wage equation, corrected for selection into work using a Heckman correction. This wage equation is estimated separately for five groups: married women, married men, single women, single men and single parents. Explanatory variables are age, work experience, occupation, industry, qualifications, state, a capital city identifier, country of birth, and some interaction terms. Wages can then be predicted by combining an individual's values of the explanatory variables with the appropriate coefficient estimates. To overcome the problem of missing information on occupation and industry for non-workers, each non-working individual is assumed to be working for a proportion in each occupation and industry. That is, the dummy variables for occupation and industry are replaced by the sample proportions in the different occupations and industries. Since it is likely that the distribution across occupation differs between employed and unemployed individuals, ABS information on the distribution of unemployed individuals over the various occupation and industry groups is used to assign proportions within occupation and industry groups to the non-workers (ABS, 2003; 2006). See Table 1, which is an updated version of Table A.4 in Kalb and Scutella (2002), taken from Kalb and Lee (2008). For a complete discussion of this approach, see Creedy et al. (2001). page 215 The effect of minimum wage changes on labour supply and income distribution Table 1: Occupation and industry percentages: unemployed August 2003 and 2006 Category Males Females Industry division 2003 2006 2003 2006 Agriculture, forestry and fishing 8.75 4.83 4.90 3.05 Mining 0.93 1.75 0.58 0.32 Manufacturing 18.90 17.73 6.05 4.41 Electricity, gas and water supply 0.52 0.97 0.07 0.16 Construction 14.71 17.67 0.94 2.01 Wholesale trade 6.16 7.30 2.59 3.45 Retail trade 13.67 15.38 22.84 26.97 Accommodation, cafés and restaurants 6.21 6.03 12.10 15.01 Transport and storage 6.16 4.52 2.88 2.17 Communication services 1.14 1.99 2.74 0.88 Finance and insurance 1.97 1.57 3.17 3.69 Property and business services 9.89 10.31 12.68 11.72 Government administration and defence 3.37 2.29 2.88 1.85 Education 0.98 1.63 5.55 5.30 Health and community services 2.23 2.17 12.68 11.64 Cultural and recreational services 2.18 1.57 3.03 2.09 Personal and other services 2.18 2.29 4.25 5.22 Occupational group Managers and administrators 3.88 5.79 2.09 1.61 Professionals 7.51 5.43 10.16 9.87 Associate professionals 5.85 9.35 6.84 10.91 Tradespersons 15.12 15.80 3.60 3.61 Advanced clerical and service workers 1.24 0.48 3.10 3.69 Intermediate clerical, sales and service workers 7.66 6.94 33.57 28.01 Intermediate production and transport workers 16.83 15.44 2.31 4.09 Elementary clerical, sales and service workers 9.01 9.53 21.83 23.03 Labourers and related workers 32.94 31.24 16.50 15.09 3.3 The wage distribution Due to the underlying data being the 2003/2004 SIHC, the wage distribution is compared to the FMW value current between May 2003 and May 2004, i.e. at $448.40 per week. With a standard week of 38 hours this equates to an hourly wage of $11.80, or a log hourly wage of $2.47. Figures 1 to 3 present graphs of the log hourly wage distribution, based on SIHC 2003/04 with hourly wages calculated as total employee earnings divided by the number of usual hours in all jobs.3 The graphs are presented separately for employed persons, unemployed persons and persons not in the labour force. For the two latter groups, hourly wages are predicted as described in Section 3.2. Individuals reporting (or with predicted) wages lower than $4 an hour or greater than $125 an hour are considered outliers and are omitted. Self-employed individuals are omitted as well. As can be seen, even for recorded hourly wages, it is not uncommon to register an hourly wage below the FMW. Since predicted wages are informed by actual observed wages 3 The relevant distribution would be the same if we had inflated the 2003/2004 wage rates with the male and female wage indices, except for a shift to the right due to the same percentage increase for all individuals. page 216 The effect of minimum wage changes on labour supply and income distribution these, too, will exhibit this phenomenon. However, for predicted wages the issue is less pronounced. The graphs show that predicted wages are always in excess of at least a log wage of 2, which translates into a wage of about $7.40 per hour. Figure 1: Log hourly wages of all employed persons 21–59 yrs Percent 10 8 6 4 2 0 1 2 3 4 5 logwage Dashed line represents the FMW of $448.40 pw ($11.80/hr) Figure 2: Log hourly wages of all unemployed persons 21–59 yrs Percent 8 6 4 2 0 2 2.2 2.4 2.6 2.8 3 logwage Dashed line represents the FMW of $448.40 pw ($11.80/hr) page 217 The effect of minimum wage changes on labour supply and income distribution Figure 3: Log hourly wages of all NILF persons 21–59 yrs Percent 8 6 4 2 0 2 2.5 3 3.5 logwage Dashed line represents the FMW of $448.40 pw ($11.80/hr) 3.4 Identification of low-paid and/or FMW employees Several individuals are known to have special wage provisions. These include casual workers who receive a loading to compensate for the lack of paid leave, juniors who may be on junior wages, and trainees and apprentices who may be on trainee wages. Furthermore, it can be argued that the calculated wages for self-employed individuals are very noisy, statistically speaking. Unfortunately, the SIHC does not collect identifiers to indicate if people are trainees, apprentices or casuals. Therefore, to avoid allowing for junior wages we limit the sample to individuals 21 years and over. Self-employed individuals can be identified and are omitted from the analysis. As a point of clarification, the wages of individuals with disability and full-time students are treated as normal wages. To clarify what proportion of people would be considered 'a FMW worker', Table 2 summarises the raw and weighted sample sizes under alternative definitions. As junior wages cannot be properly identified in the SIHC we have excluded all individuals under 21. Furthermore, to maintain a prime labour market focus we have set the maximum age at 59, which mainly affects the number of non-participants due to many individuals in the SIHC who are already retired between ages 60 and 64. Finally, we have dropped individuals with a reported or predicted wage of less than $4 or more than $125 per hour. Table 2 shows how these various restrictions reduce the sample size. Subsequently, Table 3 then summarises the sample sizes of the FMW workers under various definitions of the FMW. page 218 The effect of minimum wage changes on labour supply and income distribution Table 2: Impact of restrictions on the sample size All Age <= 59 21 <= Age <= 59 $4 / $125 trim Employed Sole parent 449 446 446 443 Single female 1,823 1,775 1,209 1,194 Single male 2,058 2,004 1,416 1,389 Partnered female 3,573 3,444 3,395 3,357 Partnered male 4,258 3,941 3,919 3,879 Total A 12,161 11,610 10,385 10,262 Weighted 8,410,515 8,072,589 7,165,587 7,076,228 Not participating (NILF) Sole parent 350 344 329 329 Single female 1,633 604 278 278 Single male 1,095 706 325 325 Partnered female 2,795 1,566 1,546 1,546 Partnered male 1,734 414 412 412 Total B 7,607 3,634 2,890 2,890 Weighted 5,531,870 2,729,273 2,130,615 2,130,615 Unemployed Sole parent 65 65 63 63 Single female 193 192 97 97 Single male 296 291 178 178 Partnered female 135 134 126 126 Partnered male 142 129 126 126 Total C 831 811 590 590 Weighted 581,890 569,735 415,491 415,491 Total A+B+C 20,599 16,055 13,865 13,742 Weighted 14,524,275 11,371,597 9,711,693 9,622,334 As can be seen in Table 2, there are approximately 14,000 individuals aged between 21 and 59 with a calculated or predicted wage between $4 and $125 per hour. This represents about 9.6 million Australians. About 7.1 million persons are employed, 2.1 million persons are not in the labour force and 400,000 persons are unemployed. Based on this sample of 14,000 individuals, we present the distribution of wages in Table 3. The lower bound for the wage is $4 due to earlier exclusions. We group wages in the following categories: between $4 and $6, $6 and $9, $9 and $11.30, $11.30 and $12.30, $12.30 and $14.60, and $14.60 to $125 (the imposed upper bound). The category between $11.30 and $12.30 captures individuals within a 50 cent margin of the FMW. We call this group the core FMW group. The sample size of this core group consists of about 700 people, with slightly fewer than half of this group being employed. The core group can be extended to include, for instance, all individuals with a wage between $9 and $11.30. This would expand the group of 'FMW workers' to just over 2,500 persons, with nearly 30 per cent of this group being employed.4 4 We can do a sensitivity analysis to a number of cut-off points for the FMW and compare the results to McGuinness, Freebairn and Mavromaras (2007). page 219 The effect of minimum wage changes on labour supply and income distribution Table 3: Sample sizes of individuals between 21 and 59 years of age by family type and employment status Lower bound for hourly wage $4.00 $6.00 $9.00 $11.30 $12.30 $14.60 Upper bound for hourly wage $6.00 $9.00 $11.30 $12.30 $14.60 $125.00 Employed Total Sole parent 3 8 21 6 59 346 443 Single female 7 22 60 49 152 904 1,194 Single male 14 28 47 62 191 1,047 1,389 Partnered female 14 71 137 105 396 2,634 3,357 Partnered male 27 68 113 92 282 3,297 3,879 Total A 65 197 378 314 1,080 8,228 10,262 Weighted 48,389 143,294 261,660 215,279 743,533 5,664,073 7,076,228 Not participating (NILF) Sole parent 0 0 0 1 219 109 329 Single female 0 0 4 14 101 159 278 Single male 0 0 4 17 84 220 325 Partnered female 0 97 1,199 142 101 7 1,546 Partnered male 0 0 153 155 91 13 412 Total B 0 97 1,360 329 596 508 2,890 Weighted 0 62,113 989,330 255,618 429,401 394,153 2,130,615 Unemployed Sole parent 0 0 0 0 30 33 63 Single female 0 0 1 8 31 57 97 Single male 0 0 0 11 62 105 178 Partnered female 0 11 88 18 9 0 126 Partnered male 0 1 50 39 33 3 126 Total C 0 12 139 76 165 198 590 Weighted 0 8,062 92,723 54,374 114,814 145,519 415,491 Total A+B+C 65 306 1,877 719 1,841 8,934 13,742 Weighted 48,389 213,469 1,343,713 525,271 1,287,748 6,203,745 9,622,334 4. Results from microsimulation The wages in the input data are changed before the data are used by MITTS. This is relatively straightforward. After the FMW group has been identified as described in Section 3, the wages for this group can be set at any arbitrary level. Running MITTS, using this amended dataset, a predicted expected labour supply measured in hours can be produced. Repeating this process for two different chosen wage levels (for example, the minimum wage before and after the increase), we can compare the difference in expected hours of labour supply. Since wages are modified manually, we maintain full flexibility in deciding which individual wages are changed and to what level. This method can be used to simulate an increase in the wage. Since the variable 'wage' is available for every individual (if the individual is not employed 'wage' is the predicted wage) these methods can be used to simulate an increase in the wage of FMW employees (that is, persons who are currently working) and in the wage of those currently not employed. page 220 The effect of minimum wage changes on labour supply and income distribution The latter case would be simulating an increase in offer wages received by people currently out of the labour force, but who have been identified as 'FMW workers' if they were to work. 4.1 Estimated cost to employers of an increase in the FMW We use the non-behavioural MITTS results to predict the aggregate increase in wage income of minimum wage workers when in 2008 minimum wage levels are increased from $13.74 to $14.31 per hour. It is assumed that this is a real wage increase, and does not account for the effect of inflation over time. Minimum wage workers are identified in the 2003/2004 SIHC data using the relevant minimum wage valid in the first quarter of 2004. FMW workers are defined as those who are within 50 cents of the FMW of that time of $11.80 per hour. The information in the 2003/2004 data is updated to 2008 through the use of the CPI and wage indices before applying the tax and social security system of 2008. Those who are identified as minimum wage workers have their wages set at the 2008 minimum wage of $13.74 per hour in the base data, which is then increased to $14.31 in the policy simulation. Given the observed hours of work, this is expected to cost employers an additional 490 million dollars per year. This does not include additional costs (such as the payroll tax) which have been estimated to add about 25 per cent to this cost.5 Using observed hours of work to compute cost assumes individuals will continue to work the same number of hours after the FMW increase. When designing alternative policies in the context of MITTS that would be comparable to the minimum wage increase, only the additional income paid to households is relevant for a meaningful comparison, since MITTS cannot include effects on parts of the economy outside the household sector. Therefore it does not matter in the microsimulation model whether government or employers pay the additional payroll tax and other on-costs associated with an increase in minimum wage. However, if effects on other sectors of the economy could be taken into account the results would be affected by who pays, for example, in affecting the employment level. Of the additional gross income paid by employers, around 174 million dollars flow on to the government through increased tax revenue and decreased government expenditure on income support payments. 4.2 Labour supply responses As mentioned in Section 2, MITTS consists of two parts: a non-behavioural component, which computes the effects of tax and social security policy changes on individuals and households; and a behavioural component, which allows these individuals to make changes to their labour supply in response to tax and social security policy changes. This section focusses on the output generated by the behavioural component. For readers who are interested in an overview of the technical details underlying the determination of labour supply responses, Appendix B provides a brief description of the behavioural component. However, this is not essential for understanding the remainder of this section. Using MITTS-B, a variety of labour supply responses can be computed in response to a range of changes in the financial incentives facing individuals and households. An increase in the FMW would be an example of a change in financial incentives since it changes the relative return to labour force participation for low-wage individuals in the population. It increases the net incomes at positive hours of work relative to being out of the labour force. The effect on labour supply depends on their current labour supply and other 5 Heather Ridout, chief executive of the Australian Industry Group, said the following on 8 July 2008 on ABC's Lateline Business programe in response to the minimum wage rise: '… it's going to cost employers who have to pay $27 a week by the time they pay payroll tax and workers comp and other on costs …' (see http://www.investortv.com/stories/60912,1963-17056,37266.html). This translates into an additional 25 per cent on top of the $21.66 weekly wage increase. page 221 The effect of minimum wage changes on labour supply and income distribution income, and on the wage and labour supply of their spouses. The substitution effect is expected to increase labour supply, since the price of leisure (which is equal to the net wage rate) has increased. However, the income effect has the opposite effect since at the same level of labour supply a higher net income is obtained. Depending on which of the two effects is larger, the overall effect can be either positive or negative. Although we can compute the financial effects of changing the minimum wage for every individual in the sample, for a number of groups it is assumed that there is no labour response and that they are fixed to their observed labour supply. These groups include those over 65 (and therefore in principle eligible for the age pension), full-time students, the self-employed, and individuals who report they are permanently or temporarily unable to work, or are receiving a disability support pension or service pension. The reason for excluding these groups from the labour supply modelling is that they are expected to behave differently compared to the other groups. For the self-employed, the relationship between total earned income and labour supply is not as simple as for many wage and salary earners, where total earned income equals labour supply multiplied by the wage rate. For this group, it seems that the FMW may just not be relevant, unless it would affect the choice of becoming self-employed. Modelling this choice would be very different to estimating labour supply for the other groups. Older people are expected to behave differently from younger people, especially once they are eligible for the age pension (and/ or have access to superannuation payments). All people temporarily or permanently unable to work because of illness or disability cannot really choose their labour supply freely as they are restricted by their health status (which we do not observe in the SIHC). Similarly, full-time students have education as their main activity in life, which will affect their labour supply choices. Table 4 shows the results from our simulation of the labour supply response to an increase in the FMW for FMW individuals (in or out of work) as identified in Section 3.4. The response is measured in terms of predicted participation rate and predicted average hours of labour supply. All groups experience an increase in their predicted labour supply due to the higher wage rate. Partnered men on minimum wages have the highest labour supply, and are expected to experience the smallest increase. Based on the numbers presented, single parents increase their expected labour supply by (13.03 – 12.68) = 0.35 hours when their wage is increased from $13.74 to $14.31 per hour. This is equal to a 2.76 per cent increase in expected hours resulting from a 4.15 per cent increase in wages. The corresponding wage elasticity for this group is about 0.66 (2.76/4.15). The average wage elasticity for partnered men is about 0.19 (0.79/4.15). Compared to the general population of partnered men, this group of minimum wage workers has lower labour supply and higher wage elasticities. Table 4: Predicted labour supply responses of minimum wage earners by demographic group Partnered Partnered Single Single Single men women men women parents Average hours of labour supply in hours/week 27.08 14.66 22.16 20.68 12.68 Average hours of labour supply after increase in FMW 27.30 15.00 22.40 20.91 13.03 Corresponding wage elasticity 0.196 0.559 0.261 0.268 0.665 Participation rate in per cent 67.12 54.25 68.45 82.63 45.77 Participation rate after increase in FMW 67.63 55.16 68.96 83.11 46.61 page 222 The effect of minimum wage changes on labour supply and income distribution Given the structure of MITTS, which is based on aggregation of income unit and individual level information, the above results on labour supply could in principle be broken down by any characteristic available in the SIHC data set. Table 5 presents the results on average across the total population. The group of minimum wage workers is relatively small, and therefore the average overall effect is small at the national level. This table allows for a comparison of the overall labour supply response with the effects on labour supply response for alternative policy changes as presented in Section 4.5. Table 5: Predicted labour supply responses among the whole population by demographic group Partnered Partnered Single Single Single men women men women parents Average hours of labour supply in hours/week 30.267 17.638 20.568 14.016 17.789 Average hours of labour supply after increase in FMW 30.286 17.656 20.578 14.023 17.796 Participation rate in per cent 72.560 56.412 73.006 60.247 55.315 Participation rate after increase in FMW 72.604 56.465 73.026 60.265 55.333 4.3 Income distribution impacts Both the non-behavioural and behavioural component of MITTS allow the calculation of a range of income distribution measures. The income distribution measures in the behavioural component take full account of the probabilistic nature of the labour supply outcomes. To give an example, it allows for the fact that for a single person there are 11 possible labour supply outcomes, each of which has a predicted probability attached to it. That is, the approach takes this uncertainty regarding the actual outcome into account. The approach used is described in Creedy, Kalb and Scutella (2004, 2006) and Creedy and Kalb (2006). This allows us to estimate the implications of the various predicted labour supply responses for the overall distribution of income in the Australian population. Both the effect on poverty levels (according to a range of different definitions: absolute or relative measures) as well as the effect on inequality can be explored. There are several pre-programmed inequality measures available in MITTS. In this paper we use the Gini coefficient to summarise inequality. We use equivalised income unit income as input into the inequality measure. The effects on income distribution are expected to be fairly small since it is a relatively limited group that would be affected (as shown in Table 3) by the modest change in FMW. This is unlikely to change the relative differences in income between individuals to a large extent. The results allowing for labour supply responses are as expected with the Gini coefficient decreasing slightly from 0.3142 to 0.3140 when increasing the FMW from $13.74 to $14.31 in 2008 for the group identified as core FMW workers. 4.4 Government expenditure impacts Even at unchanged labour supply, an increase in the FMW is expected to change individuals' and income units' eligibility for a number of income support payments, family payments and rebates, due to the increased amount of taxable income. In addition, the amount of tax paid is expected to change. This will result in changes in expenditure and revenue at the aggregate level, which are estimated to decrease government's net expenditure by about page 223 The effect of minimum wage changes on labour supply and income distribution 174 million dollars per year for unchanged labour supply at the observed hours worked. This of course assumes there is no reduction in labour demand due to the increase in the FMW. The expenditure changes could be broken down into expenditure on the different types of allowances, pensions, family payments and rebates. In addition, revenue changes could be provided separately for income tax and Medicare levy. Combining the change in expenditure and revenue allows us to compute the above change in net government expenditure on households due to the change in the FMW. 4.5 Alternative policy changes We set up a few alternatives (targeting low-income individuals) costing about 316 million dollars which, under the assumption of unchanged labour supply, would distribute the same amount to households as the increase in the FMW (490 million dollar increase in gross income minus 174 million dollars in additional tax paid plus the reduction in income support, family payments and rebates). Looking at the tax and social security reform alternatives in Buddelmeyer, Freebairn and Kalb (2006), where an amount of 5 billion dollars was used for each of the reforms, it is clear that the alternatives in our case have to be relatively modest.6 We choose two alternatives that are generally thought to benefit low-income earners, and which similar to the FMW increase are independent of household income.7 The first alternative involves an increase of the Low Income Tax Offset (LITO) with an additional $50 per year. It affects a broader group than FMW workers. The second alternative involves the decrease of the first income tax rate with 0.15 percentage points from 15 per cent to 14.85 per cent. It affects all taxpayers; thus it is not targeted at all. When returning an identical amount to households as they would have received had the FMW been increased through an alternative policy, it is likely that different individuals will receive additional income and that those who receive additional income under both alternatives receive different amounts. This is likely to result in different distributional effects. For instance, the group of FMW workers identified who experience a wage increase is relatively small. The alternative of increasing the LITO will also benefit some in this group, but in addition many more further up the income scale as well. In the case of a reduction in the lowest marginal income tax rate, all tax payers benefit. The increase in the LITO by $50 to $1,250 per annum has a day-after cost of $309 million. The Gini based on equivalised household income, assuming the additional predicted hours of labour supply are met by additional labour demand, is reduced from 0.3138 to 0.3137, a negligible effect.8 At $349 million, the day-after cost of a decrease in the lowest tax rate by 0.15 percentage points was somewhat higher than the assigned $316 million, which should be kept in mind when comparing, for example, labour supply effects. This policy change leaves inequality unchanged as measured by the Gini coefficient of 0.3138. 6 Including a larger number of individuals as an FMW individual would increase the amount of extra income paid to households. A sensitivity analysis could explore different definitions of the group of individuals who would be affected by FMW changes. 7 Although approximately the same amount is returned to households under the increase in FMW and the two alternative policy changes, assuming unchanged labour demand (and supply), the policies themselves may have different impacts on labour demand. However, as previously pointed out we are only able to analyse the impact on labour supply. 8 Note that the Gini is changed when we set wages for a group to a particular level, relative to leaving them unchanged. As a result our starting point has changed. Comparisons to the effects of the FMW increase should therefore only be made of changes from the starting point and not of the absolute values. page 224 The effect of minimum wage changes on labour supply and income distribution Table 6 presents the results for the overall population. Compared to the July 2008 situation presented in the first row, both average predicted hours of labour supply and the predicted probability of participation increase when increasing the LITO. The effect of a decrease in the bottom tax rate on the average predicted hours of labour supply is quite similar to the change in LITO; men benefit slightly more from a decrease in the tax rate and single parents appear to benefit slightly more from the increase in LITO. This small difference is probably due to a difference in incomes for these groups, with men being more likely to benefit from the tax rate decrease whereas single parents (being usually low-wage and low-income individuals) are more likely to benefit from an increase in LITO. The effect on predicted participation rates is slightly lower for all groups when decreasing the tax rate compared to increasing the LITO. This is according to expectation with the LITO providing a larger benefit to low-income earners who are more likely to be found among those who are currently not participating in the labour force. Comparing the change in average predicted hours of labour supply per week and the predicted participation rate in Table 5 with the changes in Table 6, we find that except for single parents, the increase in minimum wage generates a larger increase than the other two policy changes. The different result for single parents may be due to the fact that single parents above the minimum wage rate may be more likely to work part-time. As a result, medium- to high-wage single parents (who would not benefit from a minimum wage increase) may still benefit from an increase in the LITO, which appears most effective with regard to labour responses. Table 6: Predicted labour supply responses of a $50 LITO increase and a 0.15 percentage point decrease in the bottom income tax rate by demographic group Partnered Partnered Single Single Single men women men women parents Average hours of labour supply in hours/weeka 30.304 17.666 20.587 14.026 17.801 Average hours of labour supply after increase in LITO 30.308 17.675 20.589 14.029 17.823 Average hours of labour supply after decrease in 30.310 17.675 20.590 14.029 17.817 bottom income tax rate Participation rate in per cent 72.644 56.493 73.046 60.275 55.349 Participation rate after increase in LITO 72.662 56.527 73.059 60.289 55.435 Participation rate after decrease in bottom income 72.660 56.517 73.058 60.287 55.393 tax rate Note: a) The starting point in this table is different from the starting point in Table 5, due to setting all wages in the sample of identified minimum wage earners to the same level in Table 5. To show how those identified as minimum wage earners fare under the two alternative policy changes, Table 7 presents the labour supply responses for this group separately so they can be compared to the results in Table 4. The effects in Table 7 are clearly much smaller than those observed in Table 4. This is as expected since the increase in minimum wage targeted this group specifically, whereas the alternative policies need to divide the same amount of expenditure over a larger group. Single parents on the minimum wage appear not to benefit from these two alternative policies at all and single women even appear to be slightly negatively affected in the average predicted hours of labour supply as a result of introducing LITO. The LITO policy change is slightly better than the tax rate change for couples and vice versa for single men. page 225 The effect of minimum wage changes on labour supply and income distribution Table 7: Predicted labour supply responses of a $50 LITO increase and a 0.15 percentage point decrease in the bottom income tax rate for the minimum wage earners by demographic group Partnered Partnered Single Single Single men women men women parents Average hours of labour supply in hours/weeka 27.544 15.131 22.594 21.030 13.280 Average hours of labour supply after increase in LITO 27.557 15.148 22.595 21.027 13.280 Average hours of labour supply after decrease in 27.553 15.144 22.601 21.030 13.280 bottom income tax rate Participation rate in per cent 68.145 55.492 69.406 73.403 47.357 Participation rate after increase in LITO 68.177 55.545 69.409 73.403 47.357 Participation rate after decrease in bottom income 68.160 55.524 69.419 73.403 47.357 tax rate Note: a) The starting point in this table is different from the starting point in Table 4, due to setting all wages in the sample of identified minimum wage earners to the same level in Table 4. 5. Concluding remarks This paper has provided an example of how MITTS could help to obtain a better understanding of the likely labour supply effects arising from an increase in the FMW. This is no trivial task due to the need to account for the interactions between the taxation system and the means-tested social security system which is particularly relevant for the low-wage end of the labour market. An extra dollar in pay does not mean an extra dollar in net household income (often it is much less), and this discrepancy between gross and net income increase varies by FMW worker depending on the characteristics of the household of which the worker is part. Labour supply is assumed to depend on the net income variations. Proper assessment of labour supply effects therefore requires a tax-benefit microsimulation model to accurately compute net income starting from gross income. This paper should be seen as a first step only, which would benefit from an update to the latest SIHC data and a number of extensive sensitivity analyses, since there is a fair amount of flexibility with regard to the type of analysis and the information that can be incorporated in the analyses. For example, we could have included individuals on wage rates below the minimum wage and/or individuals just above the minimum wage rate who would have been likely to have benefited from flow-on effects of a minimum wage rate increase on their award rates. References Australian Bureau of Statistics (2003), Australian Labour Market Statistics, ABS Catalogue No. 6105 (Table 3.3), Canberra. Australian Bureau of Statistics (2006), Australian Labour Market Statistics, ABS Catalogue No. 6105 (Table 3.3), Canberra. Australian Bureau of Statistics (2007), Employee Earnings and Hours, May 2006, ABS Catalogue No. 6306.0, reissue, Canberra. Australian Bureau of Statistics (2008a), 'Average Weekly Earnings, Australia', Catalogue No. 6302.0 (Table 3), Canberra. page 226 The effect of minimum wage changes on labour supply and income distribution Australian Bureau of Statistics (2008b), 'Consumer Price Index, Australia', Catalogue No. 6401.0, Canberra. Blundell, R., Brewer, M., Duncan, A., Reed, H. and Shephard, A. (2004), 'The employment impact of recent labour market reforms: a Bank of England report', report to the Bank of England (version 13 February). Blundell, R. and Hoynes, H. (2004), 'Has "in-work" benefit helped the labour market?', in Seeking a Premier League Economy, R. Blundell, D. Card and R. Freeman (eds.), 411–59. Brewer, M., Duncan, A., Shephard, A. and Suárez, M.-J. (2006), 'Did working families' tax credit work? The impact of in-work support on labour supply in Great Britain', Labour Economics, 13, 699–720. Buddelmeyer, H., Creedy, J. and Kalb, G. (2007), Tax Policy Design and Behavioural Microsimulation Modelling. Cheltenham: Edward Elgar. Buddelmeyer, H., Freebairn, J. and Kalb, G. (2006), 'Evaluation of policy options to encourage welfare to work', Australian Economic Review, 39(3), 273–92. Cai, L., Kalb, G., Tseng, Y.-P. and Vu, H. (2008), 'The effect of financial incentives on labour supply: evidence for sole parents from microsimulation and quasi-experimental evaluation', Fiscal Studies, 29(2), 285–325. Callan, T. and Van Soest, A. (1996), 'Family labour supply and taxes in Ireland', Economic and Social Research Institute Working Paper No. 78, Dublin, Ireland. Creedy, J. and Kalb, G. (2005), 'Discrete hours labour supply modelling: specification, estimation and simulation', Journal of Economic Surveys, 19(5), 697–734. Creedy, J. and Kalb, G. (2006), Labour Supply and Microsimulation: The Evaluation of Tax Policy Reforms, Cheltenham: Edward Elgar. Creedy, J., Duncan, A., Harris, M. and Scutella, R. (2001), 'Wage functions: Australian estimates using the Income Distribution Survey', Australian Journal of Labour Economics, 4(4), 300–21. Creedy, J., Duncan, A.S., Harris, M. and Scutella, R. (2002), Microsimulation Modelling of Taxation and The Labour Market: The Melbourne Institute Tax and Transfer Simulator. Cheltenham: Edward Elgar. Creedy, J., Duncan, A., Kalb, G., Kew, H. and Scutella, R. (2004), 'The Melbourne Institute Tax and Transfer Simulator (MITTS)', as viewed on 15 May 2007 on: http://melbourneinstitute.com/labour/downloads/manualmitts5.pdf. Creedy, J., Kalb, G. and Kew, H. (2003), 'Flattening the effective marginal tax rate structure in Australia: policy simulations using the Melbourne Institute Tax and Transfer Simulator', Australian Economic Review, 36, 156–72. Creedy, J., Kalb, G. and Scutella, R. (2004), 'Evaluating the income redistribution effects of tax reforms in discrete hours models', Chapter 9 in Studies on Economic Well-Being: Essays in Honor of John P. Formby, ed. by Y. Amiel and J.A. Bishop, included in the series Research on Economic Inequality, Volume 12, 199–226. page 227 The effect of minimum wage changes on labour supply and income distribution Creedy, J., Kalb, G. and Scutella, R. (2006) 'Income distribution in discrete hours behavioural microsimulation models: an illustration', The Journal of Economic Inequality, 4(1), 57–76. Duncan, A., Giles, C. and MacCrae, J. (1999), 'Household labour supply, childcare costs and in-work benefits: modelling the impact of the working families tax credit in the UK', Working Paper, Institute for Fiscal Studies, London. Doiron, D.J. (2004), 'Welfare reform and the labour supply of lone parents in Australia: a natural experiment approach', Economic Record, 80(249), 157–76. Duncan, A. and Harris, M.N. (2002), 'Simulating the effect of welfare reforms among sole parents in Australia', Economic Record, 78, 249–63. McGuinness, S. Freebairn, J. and Mavromaras, K. (2007), 'Characteristics of minimum wage employees', report commissioned by the Australian Fair Pay Commission, 2006. Kalb, G. (2002), 'Estimation of labour supply models for four separate groups in the Australian population', Melbourne Institute Working Paper No. 24/02, University of Melbourne. Kalb, G. and Lee, W.-S. (2008), 'Wage and labour force participation in Australia: accounting for categorised observations on wages', unpublished paper, Melbourne Institute of Applied Economic and Social Research, University of Melbourne. Kalb, G. and Scutella, R. (2002), 'Estimation of wage equations in Australia: allowing for censored observations of labour supply', Melbourne Institute Working Paper No. 8/02, University of Melbourne. Keane, M. and Moffitt, R. (1998), 'A structural model of multiple welfare program participation and labor supply', International Economic Review, 39(3), 553–89. Müller, K.-U. and Steiner, V. (2008), 'Would a legal minimum wage reduce poverty? A microsimulation study for Germany', Discussion Paper No. 3491, May 2008, IZA, Bonn, Germany. Van Soest, A. (1995), 'Structural models of family labor supply: a discrete choice approach', Journal of Human Resources, 30(1), 63–88. Appendix A: MITTS This appendix provides a brief description of the Melbourne Institute Tax and Transfer Simulator (MITTS), a behavioural microsimulation model of direct tax and transfers in Australia. Since the first version was completed in 2000, it has undergone a range of substantial developments. MITTS is based on the Australian Survey of Income and Housing Costs (SIHC), a representative sample of the Australian population, containing detailed information on labour supply and income from different sources, in addition to a variety of background characteristics of individuals and households. This allows us to replicate the social security payments received and income tax paid for each individual and household according to the income tax and social security rules at any point in time or according to a hypothetical set of rules. All results can be aggregated to the population level using the household weights provided with SIHC. Pre-reform net incomes at alternative hours levels are based on the MITTS calculation of entitlements, not the actual page 228 The effect of minimum wage changes on labour supply and income distribution receipt. Furthermore, MITTS applies only income tests, as there is at present no asset imputation in the model. All major social security payments and income taxes are included in MITTS, ensuring a reasonable approximation to net income by MITTS. MITTS consists of two components. MITTS-A is the arithmetic tax and benefit modelling component and provides, using the wage rate of each individual, the budget constraints that are crucial for the analysis of behavioural responses to tax changes. For those individuals in the data set who are not working, an imputed wage is obtained. A static simulation of the effects of a tax change involves the use of alternative budget constraints in the pre- and post-reform situation. The budget constraints incorporate all main tax and transfer programs and are computed using MITTS. Assuming unchanged labour supply, MITTS can calculate the net income of each individual before and after the change together with the social security payments which are received and income tax which is paid. From these individual amounts, aggregate expenditure and revenue can be computed using the ABS-provided weights to inflate sample totals into population totals. MITTS-B examines the effects of any specified tax reform, allowing individuals to adjust their labour supply. Behaviour is based on quadratic preference functions where the parameters are allowed to vary with individuals' characteristics (for more detail on the labour supply modelling, see Appendix B). Individuals are considered as being constrained to select from a discrete set of hours levels. For singles, 11 discrete points are distinguished. For the couples in the labour supply estimation, two sets of discrete labour supply points, one for males and one for females, are used. The female hours distribution covers a wider range of part-time and full-time hours than the male distribution, which is mostly divided between non-participation and full-time work. Therefore, women's labour supply is divided into 11 discrete points, whereas men's labour supply is represented by just 6 points. The joint labour supply of couples is estimated simultaneously, unlike a popular approach in which female labour supply is estimated with the spouse's labour supply taken as exogenous. Thus, for couples there are 66 possible joint labour supply combinations. Simulations are probabilistic, as utility at each hours level is specified as the sum of a deterministic component (depending on hours worked and net income) and a random component. Hence MITTS generates a probability distribution over the discrete hours levels. The self-employed, people with disability, students and those over 65 have their labour supply fixed at observed hours. Simulations begin by recording the discrete hours level for each individual that is closest to the observed hours level. The deterministic component of utility is obtained using the parameter estimates of the quadratic preference function. To generate the random component, a draw is taken from the distribution of the error term for each hours level (an Extreme Value Type I distribution). The utility-maximising hours level is found by adding the two components of utility for each hours level and choosing the hours with the highest utility. Draws from the error terms are taken conditionally on the observed labour supply; that is, they are taken in such a way that the optimal pre-reform labour supply is equal to the actually observed labour supply. As a result, post-reform labour supply is simulated conditional on the observed pre-reform labour supply. A user-specified number of draws is produced. For the post-reform analysis, the new net incomes cause the deterministic component of utility at each hours level to change, so using the same set of draws from the calibration stage, a new set of optimal hours of work is produced. This gives rise to a probability distribution over the set of discrete hours for each individual under the new tax and transfer structure. Post-reform labour supply is based on the average value over the draws. This is equivalent to calculating the expected hours of labour supply after the change, conditional on starting from the observed hours before the change. In computing tax and revenue levels, an expected value is also obtained after the policy change. page 229 The effect of minimum wage changes on labour supply and income distribution Appendix B: The determination of labour supply responses in MITTS-B The labour supply model used in MITTS is described in detail in Kalb (2002).9 The parameter estimation and microsimulation of discrete hours labour supply in this paper follows the general method outlined in Van Soest (1995), which is explained in more detail in Creedy and Kalb (2005). In this appendix, only a brief overview is provided. Given the aim of simulating policy changes with regard to taxes and transfers, priority is given to incorporating all possible details of the taxation and social security system. B.1 The economic model The approach follows most of the literature in adopting a neoclassical framework: utility is maximised conditional on the total amount of time available to each adult and a household budget constraint. It is expected that utility increases with an increase in leisure and home production time (referred to as leisure for convenience) and income (consumption of all other goods). Households maximise utility by choosing leisure (and hence labour supply) for each adult.10 The labour supply values for each parent are the endogenous variables in the model. Wage rates, non-labour income (other than taxes and transfers), household composition and other household attributes are exogenous. Specifically, the exogenous factors include the number and ages of children, the age and education level of each parent, and components of income other than labour earnings, transfers and taxes. The rules of the taxation and social security systems are used to relate the net income of the household with its choices of labour supply. Separate models are specified for single men, single women, single parents and couple families. Turning to the choice of functional form, the labour supply function is modelled as a discrete choice. Restricting the number of possible working hours to a limited set of discrete values is done in many other studies (for example, Van Soest, 1995; Keane and Moffitt, 1998; Duncan et al., 1999). The advantage of using a discrete choice framework is that it allows more complex modelling of the budget constraint. Assuming there are two adults in the household, the labour supply is derived from the following: max. U(x, l 1 , l 2) (B.1) subject to a time constraint for each adult: l1 + h1 = T and l2 + h2 = T (B.2) (h1, h2) є A × B and subject to a budget constraint: x = w1h1 + w2h2 + y1 + y2 + B(c,w1h1 + w2h2 + y1 + y2) – (B.3) τ(B,w1h1 + y1,w2h2 + y2,c) where U( ) is the utility function of a two-adult household; l1 and l2 indicate the leisure hours (including home production) per week of the husband and wife (married or de facto) respectively; h1 and h2 are the hours of work of husband and wife; A and B are the sets of discrete points from which values can be chosen for h1 and h2; T is the total time 9 The labour supply parameters are currently being updated. Instead of using the SIHC from 1994/1995 to 1997/1998, we use the SIHC from 1999/2000 to 2003/2004 to estimate labour supply parameters for couples, single men, single women and single parents. 10 It is assumed that all non-employed are voluntarily not working and that participants are at their preferred labour supply points. page 230 The effect of minimum wage changes on labour supply and income distribution available for each person in the household; x indicates net income per week, which is assumed equal to household consumption; w1 and w2 are the gross wage rates of husband and wife respectively; y1 and y2 are the non-labour incomes of husband and wife; c is a set of household attributes; B(.) is the amount of benefit a household is eligible for given their household characteristics c and household income; and τ is the tax function which indicates the amount of tax to be paid. In the discrete choice case the budget constraint is defined on a discrete set of points h1 є A = {0,h11,h12,…,h1m} and h2 є B = {0,h21,h22,…,h2k} on the interval [0,T], instead of being defined on a continuous set of working hours [0,T].11 Using these sets, net income x is calculated for all (m + 1) × (k + 1) combinations of h1 and h2. For this limited set of hours, one can then calculate the level of utility generated by each possible combination of hours. The choice of labour supply is simultaneously determined for both adult members of the household. Depending on the choice of utility function, different interactions between household income and the labour supply of adults can be modelled. For one-adult households, the model is simplified by excluding everything related to the second adult. B.2 The econometric model To deal with unobserved market wages for people who are not working, we estimate their potential wage using a wage equation estimated on workers.12 A two-stage selection model is used to correct for possible selection bias. Separate wage equations are estimated for married men, married women, single men, single women and single parents (see Kalb and Scutella, 2002).13 Based on the assumption of utility maximisation for each household and assuming households behave independently, the likelihood function can be written as: Pr(U(x((h1i,h2i)r),(h1i,h2i)r,εr) ≥ U(x((h1i,h2i)s),(h1i,h2i)s,εs) for all s) (B.4) i where r stands for the combination h1 and h2 that is preferred; s stands for all possible combinations which can be made, given the discrete choice sets for hours worked; and εr and εs represent error terms. Adding an error term to the utility function prevents contributions to the likelihood of any data point from becoming zero, by allowing for optimisation errors. Equation (B.4) states that the utility of the observed labour supply point is higher than the utility in any other labour supply point. Choosing an extreme value specification for the error term in (B.4) results in a multinomial logit model. Following Keane and Moffitt (1998), a quadratic specification is used for the utility function. This utility function is simple but quite flexible in that it allows for the leisure of each person and income to be substitutes or complements. Parameters representing fixed costs of working are included in the utility when positive labour choices are made. The fixed cost of working parameter, γ, is included in the income variable x to indicate the cost of working versus non-participation (following Callan and Van Soest, 1996). As a result of the inclusion in x, this cost of working parameter is measured in dollars per week. The utility is specified as follows: 11 0, h11, h12, etc. represent the discrete values which labour supply can take. Here we have chosen 0, 5, 10, 15,…, 50 hours of labour supply for married women and singles. Given the low number of married men working low part-time hours, they are assumed to choose from 0, 10, 20, 30, 40 or 50 hours. 12 This follows the approach used by Van Soest (1995) and many others in the area. 13 As before with the labour supply models, the wage models have been updated using more recent data: the SIHC 1999/2000 to 2003/2004 instead of the SIHC 1994/1995 to 1997/1998. page 231 The effect of minimum wage changes on labour supply and income distribution U(x,h1,h2) = βx(x – γ1 – γ2) + β1h1 + β2h2 + αxx(x – γ1 – γ2)2 + α11h12 + (B.5) α22h22 + αx1(x – γ1 – γ2)h1 + αx2(x – γ1 – γ2)h2 + α12h1h2 where α.. and β. are preference parameters and γ1 and γ2 are the fixed cost of working parameters to be estimated (where the indices 1 and 2 denote the husband and wife respectively). The fixed cost is zero when the relevant person is not working. For single adult households, all terms related to h2 drop out of the utility function and γ2 is set to zero. We include observed heterogeneity by allowing β1, β2, βx, γ1 and γ2 to depend on the personal and household characteristics listed in Section 5.1.1. Note that the estimated parameters of the labour supply model are actually those of the utility function. B.3 Calculation of expected labour supply in simulation Once the complete model has been estimated, the results can be used to calculate the expected labour supply for people with certain known characteristics and under known social security and taxation rules (as is done in MITTS). The parameters of the utility function indirectly determine labour supply in terms of a distribution of hours worked. By assuming an 'extreme value' distribution for the error term in the utility function, it is possible to derive the relationship between the probability distribution of hours of work and measured utility levels at each hours level in a convenient form. After estimation, a point estimate of the expected hours of work (that is, labour supply) can be computed by multiplying the probability of working at each discrete value of labour supply by the corresponding discrete value of labour supply, and taking the sum of these product terms. Thus, to obtain the expected labour supply of the husband, we first calculate the utility U(x(h1,h2), h1, h2) for each possible combination of labour supply for both adults in the household. This is achieved by substituting the estimated parameter values into equation (B.5) after calculating the net income for the relevant combination. Once the utility values are known, a simple logit transformation (associated with the 'extreme value' distribution for the error term) provides the probability of each possible combination occurring according to the estimated model: exp(U(x(h1,h2),h1,h2)) p(h1,h2) = (B.6) exp(U(h1,h2),h1,h2)) over all h1,h2 These probabilities can then be used to calculate the expected value of labour supply for the husband by simply aggregating the probabilities over all possible values of h2 for each value of h1. In this manner, the marginal probability of h1 is obtained, which can then be used to calculate the expected value of h1 in the usual way. The formula for this procedure looks as follows: E(h1) = p(h1,h2) h1 h1 h2 (B.7) The expected value for the wife's labour supply can be obtained in a similar way and to calculate similar values for singles, equations B.6 and B.7 can be simplified by leaving out all components that relate to h2. page 232 The effect of minimum wage changes on labour supply and income distribution In simulation, using calibration to start from the observed values of labour supply, extreme value random error terms ε are drawn and added to the deterministic component of utility U. Error terms resulting in the observed hours are stored and used to simulate labour supply responses due to a policy change. Labour supply responses after a policy change are calculated by computing the new deterministic utility levels and adding the stored error terms. Usually a set of error terms is used per observation so that a distribution of labour supply after the change can be generated. page 233 The effect of minimum wage changes on labour supply and income distribution Fourm discussion General discussion following the presentation focussed on: • the extent to which changes in labour supply following an increase in minimum wages might be offset by changes in labour demand; • the effect of Commission decisions on the whole range of Pay Scales, and the resultant difficulties this may pose for modelling labour supply effects; and • the usefulness of modelling a range of possible policies that would not affect labour demand. A number of participants commented that understanding the labour supply effects of increases in minimum wages is of limited value unless it is combined with an understanding of the effects of those increases on demand for low-paid labour. The author agreed that this is a limitation of the MITTS model, but maintained that it was nevertheless important to know the direction of the net effect of changes in minimum wages on labour supply. There was also a discussion of the implications for labour supply modelling of the fact that minimum wage increases affect far more workers than just those at or near the FMW. It was agreed that this posed some challenges, which might be at least partly overcome with Secretariat assistance to more accurately assess the likely characteristics of jobs affected by Commission decisions. Another suggestion was that it would be more appropriate to focus the modelling on policies such as earned income tax credits targeted specifically to single parents, which might have a powerful effect on labour supply without adversely affecting labour demand. In this context, the usefulness of modelling small changes to the Low Income Tax Offset (LITO) was questioned, given that this may be an 'unknown entity' for many people and thus unlikely to affect labour supply significantly. Forum discussion summary prepared by the Australian Fair Pay Commission Secretariat. page 234
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Its two decades since the USSR broke up. But what happened to those Soviet countries? Here's the key data

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Tuesday, 7 July 2015
Last updated 18 hours ago
Jan 30 2013 | 2:42pm ET
The Man Group's FRM Capital Advisors hedge fund seeding business will invest in six-month old hedge fund helmed by a Highbridge Capital Management and Citadel Investment Group veteran.
FRM will make a "significant investment" in Hong Kong-based Arena Capital Management. The fund is headed by Toby Bartlett and focuses on Japan and other northern Asia stocks.
FRM did not specify how much it would invest in Bartlett's fund.
"We see this both as an opportunity to be able to generate alpha in what is traditionally a less-researched market by hedge funds where greater inefficiencies will allow managers that do in depth analysis to create an edge," FRM's seeding chief, Patric de Gentile Williams, said.
Bartlett founded Arena last year. He was formerly an Asian stock manager at Highbridge and, prior to that, served as a Japan-focused stock manager at Citadel.
The Arena seed is FRM's first investment since Man acquired it in May.
Jun 26 2015 | 6:47am ET
If you want to set up an offshore hedge fund, like any great team, you're only...
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The Wall Street Decathlon — a 10-event physical challenge that will crown "Wall...
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In this article, financial expert Greg Silberman explores how to hedge a private...
May 27 2015 | 2:15pm ET
Support Hedge Funds Care, also known as Help For Children (HFC), by participating in this year's raffle. All proceeds go to support HFC's mission of preventing and treating child abuse. Read more…


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Greece has called on the eurozone to write off over €80 billion, or 30 per cent, of its debt, echoing the International Monetary Fund's warning that the country can not pay back its creditors. Alexis Tsipras, the Greek prime minister, seized on the IMF's conclusions to attack eurozone countries that have ruled out any debt write-offs, which are anathema to national parliaments in Germany, Finland, Austria and the Netherlands. "Yesterday an event of major political importance happened," he said. "The IMF published a report on Greece's economy which is a great vindication for the Greek government as it confirms the obvious - that Greek debt is not sustainable." As Greeks prepared for Sunday's referendum on European Union and IMF austerity measures and the country's banks began running out of cash, Mr Tsipras snarled defiance in a televised address to t
A retired elite police marksman who shot a suspected armed robber six times at close range has been cleared of murder at the Old Bailey. Anthony Long, 58, allegedly took just six hundredths of a second to open fire on Azelle Rodney, 24, in one of the most high-profile and contentious deaths at the hands of police of the past decade. He fired eight shots in less than three seconds after a car carrying Rodney was forced to a halt in a "hard stop" by armed police in Mill Hill, north London on 30 April 2005. Six of the bullets hit Mr Rodney, with four striking his head, as he sat in the back of the car. Mr Long convinced the jury that he believed he and his colleagues were in "imminent danger" when he opened fire on the car. He told jurors: "I was absolutely convinced that he'd ducked down, picked up a firearm." The prosecution had argued that the Metro
Britain is seeing a surge in Sharia marriages — many of them polygamous — as young Muslims shun legally binding unions. As many as 100,000 couples are living in such marriages, which are not valid under UK law, and bypassing register offices, experts said. Ministers have raised fears that women can be left without the right to a fair share of assets if the relationship ends, while others are forced to return to abusive "husbands". A leading Islamic family lawyer warned that the increase in Sharia ceremonies among the 2.7 million-strong Muslim population in Britain was also behind a growth in "secret polygamy". "Probably a quarter of all couples I see involve polygamy issues," Aina Khan told The Times. "There has been a huge rise in recent years because people can have a secret nikah [Islamic marriage] and no one will know about it." The growth in a para
World No 1 was forced to summon all her fighting qualities to repel Watson
On Heathrow, like Scotland, like his own leadership. He's good at it
A great new rockumentary series; plus, those Lord Lucan conspiracy theories
Alexis Tsipras offers chaos and isolation with his flawed referendum on the country's bailout. The crisis can only end if voters reject him
The government must build more houses and tax them less
Look beyond the high cost of homes. London is cheap
The youngest casualty was 19, the oldest 80. Today at noon, the nation stopped to honour 18 men and 12 women killed by a terrorist gunman
Engineering & Asset Management Director, RNLI, Poole, Dorset, £83,839 - £98,634 (dependent on experience), Relocation assistance may be provided
Senior Lecturer Film (Film/Sound), Arts University Bournemouth (AUB), Bournemouth, Dorset, £28,695 - £35,256
Sales Director, Matrix SCM, Milton Keynes, A significant six figure package which is negotiable
100s of Graduate Jobs & Schemes. Start your Search Here
Lamborghini Aventador LP 700-4 Roadster Grigio Estoque with nero marrone leather
1965 Ferrari I 250 TR recreation red with leather
Bentley Continental GT V8 glacier white with beluga hide
Aston Martin Vanquish 2+2 volcano red with winter wheat leather
Set over four floors, in excess of 14,000 sq.ft. and with exceptional attention to detail.
A stunning setting of open countryside, in close proximity to nearby towns.
Salcombe's first development of new properties right on the water's edge for almost twenty years.
This property is for sale on Zoopla, but not for long.
7 Nts at the Stylish 4* Ocean Two Hotel from only £879pp. Save 30! Dept 1 Sept – 22 Oct.
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When staying at the 4* db San Antonio Hotel & spa, Malta this summer, book by 1 July
Save £500pp on 2016 European cruises inc meals, selected drinks, tips & excursions.
Nominate your favourite hotels, airlines, tour operators and destinations in our annual travel awards
Win a BMW 3 Series for the summer plus trips to top sporting events
Austerity programme leaves Latvia's economy booming
Rewarding success through innovation from entreprenuers to SMEs and FTSE100
Find out who is headlining and what is new about this year's festival
Africa Travel has more than 30 years of experience providing every trip imaginable to spectacular destinations
How seismic mapping unlocks further reserves
Why FanDuel fantasy sport is a big winner in the US
Thinking of setting up a business abroad? Don't go anywhere without consulting this guide
Realise your potential in the RAF Reserves
David Cameron, George Osborne: A shake-up of inheritance tax and cracking down on nimby councils will give young people a foothold on the property ladder
Daniel Finkelstein: The willingness of my parents to tolerate defective television equipment has long been a source of amazement to their children
Paul Johnson: There are lessons to be learnt from the period before the 2008 crisis that are just as important for Osborne as for the next Labour leader
Hugo Rifkind: I'm not necessarily saying that in boiling weather we should put on flowery chiffon, but something's got to change
Uber suspends French car-sharing service following violent protests
Medical experts are investigating fears that ebola, which has killed 11,000 people, could be making a comeback in the Democratic Republic of Congo
A number of posts on one of the internet's most popular websites were blocked in a protest by the volunteer moderators who run the site
The wider eurozone and Britain are both shrugging off the crisis in Greece, each posting encouraging economic data
Aetna said it would acquire all the outstanding shares of Humana in cash-and-stock at roughly $230 a share
Shares in the company jumped as the City reacted with relief that the oil major was finally drawing a line under its potential liabilities
Company has signed a deal with Sprint, the mobile network, to open as many as 500 stores in the US, initially in Miami and Chicago
Rick Broadbent assesses in which areas the Spaniard can change his game
French Open champion completes 6-4, 6-3, 6-3 dismissal of Fernando Verdasco to reach the last 32 at Wimbledon without dropping a set
Scot's dedication to improving his compatriots extends to inviting them to train with him and spending hours on his laptop watching them compete
Philip Webster: the arch strategist is planning to turn the benefit cuts into a political fight with Labour that will make it much harder for his own MPs to rebel
Danielle Sheridan: Craig Mackinlay, MP for South Thanet, said there was no longer a place for Ukip now there will be a referendum on Europe
Bruno Waterfield: Mr Cameron's pitch in Brussels for European Union reform has been reduced from centre of attention to something of an "and finally"
Philip Webster: Europe and the UK have reminded the PM that if he was hoping for an easier ride he most certainly is not going to get it
Hamilton was fourth-fastest behind Ferrari drivers in British GP practice
The forward is making a loan move from Monaco, with the London club having an option to sign the Colombian on a permanent £35 million deal
Champions start at home in season shifted later for the Rugby World Cup
Johnson said that a 2:1 was so easy to come by that students can 'coast' and still get one. Boris got a 2:1 and reportedly lost sleep over missing a first
Tim Montgomerie says that our revulsion at the Tunisia terror attack should not turn us into a society that tries to eradicate all vestiges of religion
The old pals' act that pulled off the election victory knew just how to do it, says Lord Feldman. 'David was emotional at winning. He couldn't compute it'
The lapwing is a performer of the highest aeronautical ability and apparently inspired RJ Mitchell's design, giving the aircraft its speed and manoeuvrability
From blockbusters to Booker bets, we pick the best books for the beach
His moody Camden nudes are notorious but now an exhibition focuses on his time in the chi-chi resort of Dieppe
Odyssey has been compared unfavourably to Homeland, with its subject matter and female lead, but that's a little lazy
As part of your membership you can enjoy a free eBook every month with Kindle. Download this month's book, After the Funeral by Agatha Christie
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Watch our Q&A evening with former professional boxer Ricky Hatton. Telling Times journalist Matthew Syed, Ricky about the highs and lows of his career
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I have stayed at this hotel on a number of occasions, both for business and pleasure over the last 20 years. Although the ownership has changed, we found on our last trip here the beauty of the location, the quiet, and the helpful staff have not changed. We spent nearly a week here on the last visit, doing day trips... More
Top-rated Attractions Nearby
Top-rated Restaurants Nearby


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I have created a html page with the following code in between "head" tags:
meta http-equiv="Refresh" content="5; url= contacts.html"
Now when the above code is added to a web page, It waits for 5 seconds and moves the contacts.html page. If you press the "back" button on your browser, the browser will take you to the previous page which is the "intro page" or the page that I have entered the above code.
But I need to stop that from happening(returning back to the intro page when the 'back' button on the browser is pressed). Is it possible to do so? If its possible, then how? o_O


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J E M Model
ESPhotographyPhotographer Male Sydney, New South Wales, Australia
My Website: www.ESPhotography.com.auMy MM URL: http://www.modelmayhem.com/photographyinfocus
Mayhem # 2207351
About MeHi.
I am simon and I am a photographer from the Eastern Suburbs of Sydney. I am the owner and founder of ESPhotography. I have been taking photographs for about 10 years now and discovered that I had a passion for it very soon after I got my first SLR.
I moved to DSLR's about six years ago and have not looked back since. I have enrolled and completed several courses at the Australian Center for Photography. The last being a lighting course.
I have started taking a big interest in portraiture and glamour Photography after I finished the lighting course at the ACP and discovered how much fun can be had trying to create new lighting effects.
I have spent the last few months taking photographs on location at some amazing beaches and parks around Sydney with some wonderful models and would love to continue doing so.
I also have just purchased a mobile studio that can be set up anywhere to create some amazing photos.
I am really looking forward to creating a great base of which to catapult myself forward in 2013.
[i]I have a Facebook page and would love you to stop by and have a look.[/i]
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Luminous Makeup by Mia Makeup Artist
Loading Content


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Search Committee Orientation
How do I find resumes?
What questions do I ask references?
Can the congregation have input into the process?
What's the difference between confidential and secretive?
What questions should I ask the prospective minister and spouse?
This training is designed for lay persons, search committees, ministers, and other interested persons. Individual local church committee orientation is available by calling Joel Wood, Interim Director of Missions, 267-3794.
Becky Witt, Administrator
Churches of the Week
June 28, 2015
White Oak Baptist Church
Tony Wilson, Pastor
310 Memorial Dr
Chattanooga, TN 37415
Whiteside Baptist Church
Bobby Hubbard, Pastor
PO Box 208
Whiteside, TN 37396
Would YOU like to learn how to teach English as a Second Language or Tutor Children & Youth? Our next classes are in August, 2015. The Saturday classes are from 9 AM - 4 PM. Call 267-3794 for more information or to sign up. You'll be glad you did!
Free Bracelet / Tattoo Kits
at HCBA Office
Do you have questions about world religions? Denominations? Cults?


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Showing Suppliers 1 - 3 of 3
Grainger Industrial Supply (33 Products)
Address: 10075 Sam Neace Dr. Branch 153, Florence, KY
Business Type: Distributor
Description: Grainger helps customers save time and money by providing them the right products to keep their facilities up and running. Grainger's customers are 2.0 million businesses and institutions in 157 countries. While each customer has a unique facility to operate and a different problem to solve, our... (more)
Emerson Power Transmission
Address: 7120 Buffington Road, Florence, KY
Business Type: Manufacturer
Mubea, Inc.
Address: 8252 Dixie Highway, Florence, KY
Business Type: Manufacturer


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