Estimation of Wage Equations in Australia: Allowing for Censored Observations of Labour Supply

This paper illustrates the use of the Melbourne Institute Tax and Transfer Simulator (a behavioural microsimulation model) in examining the impact of two hypothetical policy changes to Family Payments as they were in the March 1998 tax and transfer system. The effects of the policy changes on the choice of hours worked and the labour force participation rates among couples with dependent children are the focus of the analysis with the overall effect on net Government expenditure examined. We find that reducing the withdrawal rate on the more-than-minimum rate of Family Payment is quite costly to the Government, with a small positive labour supply response reducing this cost slightly. The second policy change, which replaces the "sudden death" income test for the minimum rate of Family Payment with a gradual taper and increases the threshold level of income above which the minimum rate begins to be withdrawn, results in a smaller increase in government expenditure and has a negligible labour supply response.