Estimating the Impact of the Québec’s Work Incentive Program on Labour Supply: An Ex Post Microsimulation Analysis

In 2005, a wage subsidy program was established in Québec to encourage low-income individuals, particularly recipients of social assistance, to work, by offering them fiscal relief. We analyse the effect of this program (the Prime au travail) with a microsimulation model which determines the impact on the labour supply. We estimate the variation in the labour supply at the extensive and intensive margins which allows us to grasp both the income effect and the substitution effect of the Prime au travail on individuals’ willingness to work. On the other hand, our labour supply model has the necessary characteristics to link it to a general equilibrium model and offer an integrated macro-microsimulation analysis. Nonetheless, unlike the usual microsimulation models employed in integrated macro-microsimulation analysis, we provide a number of innovations, notably the analysis at the intensive margin so that it captures both the substitution effect and the income effect. Our results show that a number of individuals entered the labour market in response to the Prime au travail, while others decided to work fewer hours, due to increased income linked to the program. Ultimately, the variation in labour supply was less in the intensive margin than in the extensive margin and it is positive for all types of households, with the exception of female single parents.