The Estimation of Labor Supply Over Kinked Budget Constraints: Some New Econometric Methodology

Abstract

Most programs of taxation and income maintenance imply that the tax rate faced by an individual changes at different levels of laborsupply. As a result, the individual's budget constraint is kinked which presents problems for the empirical study of labor supply. This paper developes econometric methodology for estimating labor supply in the presence of taxes. Equations for market wage and shadow price are used to describe labor supply choices over a kinked budget coastraint This approach makes a distinction between the discrete choice of which segment or corner of the kinked constraint to work on and the selection of the actual number of hours of work along linear segments.