A segmented labor supply model estimation for the construction of a CGE microsimulation model: An application to the Philippines

Labour market analysis is an important element to understand the inequality and poverty within a given population. The literature reveals that the informal sector is characterised by a great deal of flexibility and exempt from formal market rigidities but on the other hand, this sector can constitute a trap from which it is difficult to exit for workers active in the sector with low wages. In this paper we aim to identify the main characteristics differentiating the labor supply of workers on the informal and formal market in the Philippines while estimating these two labor supplies, capturing discrete choice or changes in employment status. We use these estimates to construct a labor supply model that can serve as an input for a broader macro-microsimulation model applied to the Philippines. The results of the estimation provide relatively intuitive findings, highlighting some differences between the two markets. We also contribute to shedding some light into this macro-microsimulation modelling framework that is generally opaque in describing how to construct a microsimulation model with endogenous discrete choice model linked to a CGE model.