An Australian Model for Labour Supply and Welfare Participation in Two-Adult Households

Abstract

In this paper, a simultaneous discrete choice model for welfare participation and labour supply of two-adult households is estimated. It is assumed that in addition to the indirect effect of welfare participation on utility, welfare participation also has a direct effect. The resulting net effect is unknown and may depend on personal characteristics. To account for the direct effect of welfare participation on utility, a parameter to measure the disutility associated with welfare participation is included in the utility function. This model allows for the fact that not all eligible people are participating in welfare. The results indicate that there is evidence of a significant disutility associated with welfare participation. From simulations, it is found that a change in the benefit withdrawal rate or the maximum benefit level does not seem to have a large effect on the labour supply of either adult.