Labour Economics and Social Policy:
Behavioural Microsimulation and MITTS
Research in this area examines labour force participation and the working hours of individuals. Work incentives, particularly those arising from the interaction between the tax and transfer system, are a significant focus of this research.
Behavioural microsimulation policy modelling is an important strand of economic research that examines issues in social security.
The modelling differs from non-behavioural or “static” microsimulation modelling, which is undertaken in Australia by research institutions such as the National Centre for Social and Economic Modelling.
Behavioural microsimulation modelling incorporates a variety of behavioural responses into the incentive structure imposed by the social security system. Of these responses, those relating to labour supply are particularly important.
The Melbourne Institute Tax and Transfer Simulator, known as MITTS, is designed to model how policy changes to any component of the income tax and transfer payments system may affect individuals and households in Australia.
Originally developed by John Creedy and Alan Duncan in 1998, MITTS is behavioural microsimulation modelling software. It is the joint intellectual property of the Melbourne Institute and the Australian Government’s Department of Social Services.
MITTS can be used to explore the effects on government expenditure of previous or proposed policy changes affecting the tax and social security system in Australia.
Expenditure changes can be predicted using MITTS with and without taking into account the potential labour supply changes resulting from policy reform.
The predicted labour supply changes are based on the estimated parameters of both an Australian labour supply model and a wage model.
MITTS contains detailed information on tax and social security systems in use between early 1995 and 2013. Each of these systems may be used as a base for simulating policy changes, with all simulations using weighted samples of the Survey of Income and Housing Cost from 1994/1995 through to 2009/2010.
To find out more about the MITTS methodology or its tax modelling and behavioural components, please refer to the MITTS Manual.
Tax and Transfer simulations
The Melbourne Institute has undertaken a range of policy simulation projects using MITTS, many of which have resulted in a variety of publications.
Examples of simple policy simulations are available in two working papers: one on a taper rate reduction and one on changes to family payment taper rates.
Several projects have also led to the extension and enhancement of MITTS. For further details, please refer to the relevant technical papers.
The Melbourne Institute was commissioned by the New Zealand Treasury during 2003 to develop a behavioural microsimulation model known as TaxMod-B. This model was based on MITTS.
Between 2011 and 2015, the Institute updated TaxMod-B to become a new behavioural microsimulation component of the New Zealand Treasury’s static microsimulation model, TaxWell. This new component became known as TaxWell-B.
In 2016, the Melbourne Institute continued working with the New Zealand Treasury, adding a “welfare change” module to TaxWell-B.
If you have any questions about MITTS or behavioural microsimulation modelling, please contact the Melbourne Institute.