The Effect of Financial Incentives on Labour Supply: Evidence for Sole Parents from Microsimulation and Quasi-Experimental Evaluation

Melbourne Institute Working Paper No. 10/05

Date: July 2005


Lixin Cai
Guyonne Kalb
Yi-Ping Tseng
Hong Ha Vu


The aim of this paper is to analyse work incentive effects from a recent change in the Australian tax and transfer system on sole parents. Two approaches are used in the analysis: microsimulation and quasi-experimental evaluation. Both approaches examine the effects on the probability of employment and average working hours. The results from both approaches show that the combined changes introduced in July 2000 involving reduced withdrawal rates, changed family payments and lower income tax rateshave increased labour supply for sole parents to a small extent. The results from microsimulation are slightly smaller than those estimated from a quasi-experimental approach using matching techniques to control for alternative influences. In addition, using microsimulation, the separate effects of the components can be estimated. It was found that reduced benefit withdrawal rates, a reduction in the withdrawal rates and abolition of the sudden death for family payments, and lower income tax rates all increased labour supply. However, the replacement of tax rebates with additional non-income-tested family payments is estimated to have a negative effect on labour supply.

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