Working Paper 557

A Structural Model of Multiple Welfare Program Participation and Labor Supply

Michael P. Keane
Robert Moffitt

Published October 1, 1995

One of the long-standing issues in the literature on transfer programs for the U.S. low-income population concerns the high cumulative marginal tax rate on earnings induced by participation in the multiplicity of programs offered by the government. Empirical work on the issue has reached an impasse partly because the analytic solution to the choice problem is intractable and partly because the model requires the estimation of multiple sets of equations with limited dependent variables, an estimation problem which until recently has been computationally infeasible. In this paper we estimate a model of labor supply and multiple program participation using methods of simulation estimation that enable us to solve both problems. The results show asymmetric wage and tax rate effects, with fairly large wage elasticities of labor supply but very inelastic responses to moderate changes in cumulative marginal tax rates, implying that high welfare tax rates do not necessarily induce major reductions in work effort.

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