A New Specification of Labour Supply in the MONASH Model with an Illustrative Application

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Dixon, Peter and Rimmer, Maureen T (2003) A New Specification of Labour Supply in the MONASH Model with an Illustrative Application. Australian Economic Review, 36 (1). pp. 22-40. ISSN 0004-9018 (print) 1467-8462 (online)


MONASH is a dynamic general equilibrium model of the Australian economy. This article describes a new labour-market specification for MONASH in which people are allocated in year t to categories according to their labourmarket activities in year t – 1. People in each category plan their labour supplies by solving an optimisation problem. Via these problems, we introduce the assumption that people in employment categories supply labour more strongly to employment activities than do people in unemployment categories. Thus we find that employment-stimulating policies in t – 1 increase labour supply in t by shifting the composition of the labour force in t in favour of employment categories and away from unemployment categories. We illustrate this idea by using MONASH to simulate the Dawkins proposal to combine a freeze on award wage rates with tax credits for low-wage workers in low-income families. We find that the Dawkins policy would generate a significant short-run increase in employment. With the increase in employment generating an increase in labour supply, the employment benefits of the policy would persist over many years. However, in the long run, we would expect the effect of the policy on aggregate employment to be small and to depend on how the policy affected the ratio of real after-tax wage rates to unemployment benefits.

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Item type Article
URI https://vuir.vu.edu.au/id/eprint/24582
DOI 10.1111/1467-8462.00265
Official URL http://onlinelibrary.wiley.com/doi/10.1111/1467-84...
Subjects Historical > FOR Classification > 1402 Applied Economics
Historical > Faculty/School/Research Centre/Department > College of Business
Current > Division/Research > Centre of Policy Studies (CoPS)
Keywords Australian economy, employment-stimulating policies, labour supply, wage rates
Citations in Scopus 10 - View on Scopus
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