Thor Olav Thoresen

Theoretical and practical arguments for modeling labor supply as a choice among latent jobs

Models of labor supply derived from stochastic utility representations and discretized sets of feasible hours of work have gained popularity because they are more practical than the standard approaches based on marginal calculus. In this paper we argue that practicality is not the only feature that can be addressed by means of stochastic choice theory. This theory also offers a powerful framework for developing a more realistic model for labor supply choices, founded on individuals having preferences over jobs and facing restrictions on the choice of jobs and hours of work. We discuss and clarify how this modeling framework deviates from both the conventional discrete approach (Van Soest, 1995), as well as the standard textbook approach based on marginal calculus (Hausman, 1985). It is argued that a model based on job choice opens up for a more realistic representation of the choice environment, and consequently offers the possibility of conducting a richer set of simulations of alternative policies.

Inequality Comparisons in a Multi-Period Framework: The Role of Alternative Welfare Metrics

This paper considers the use of alternative welfare metrics in evaluations of income inequality in a multi-period context. Using Norwegian longitudinal income data, it is found, as in many studies, that inequality is lower when each individual’s annual average income is used as welfare metric, compared with the use of a single-period accounting framework. However, this result does not necessarily hold when aversion to income fluctuations is introduced. Furthermore, when actual incomes are replaced by expected incomes (conditional on an initial period),using a model of income dynamics, higher values of inequality over longer periods are typically found, although comparisons depend on inequality and variability aversion parameters. The results are strongly influenced by the observed high degree of systematic regression towards the (geometric) mean, combined with a large extent of individual unexpected effects.

A Suggestion for Evaluating the Redistributional Effects of Tax Changes: With an Application to the 2006 Norwegian Tax Reform:

An evaluation strategy for answering the question, “Is the tax schedule more redistributive after a reform than prior to a reform?” is presented. The procedure builds upon addressing measures of tax redistribution, utilizing micro data from periods before and after the reform. Tax redistributional effects are measured in terms of a “common base” approach, which means that a benchmark is established which facilitates identifying how the redistributional efforts of policy makers develop over time. When applying this method for evaluation of the 2006 Norwegian tax reform, the results suggest that the modification of the dual income tax system of the 2006 reform has improved the redistributional effect of the schedule. This conclusion is qualified by addressing measurement challenges brought up by the reform, such as behavioral responses and timing effects.

The inequality effects of a dual income tax system

Abstract A dual income tax system, combining progressive taxation of labor income with proportional taxation of income from capital, may or may not be unambiguously inequality reducing. Examples show that the degree of correlation between the distributions of wage and capital income, the degree of tax rate differentiation in the DIT, and reranking of tax-payers can be expected to complicate a clear-cut analysis. We trace out what can be said definitively, obtaining sufficient conditions for unambiguous inequality reduction in certain cases, and more generally identifying the nature of the implicit redistribution between labor and capital income components which is sufficient to ensure overall inequality reduction.

Heterogeneity of the Carnegie Effect

The Carnegie effect is the harm inherited wealth does to a recipient’s work effort. Carnegie effect estimates are few, reflecting that such effects are hard to trace. Most previous studies rely on data from limited-size surveys. We use information from administrative data covering the entire Norwegian population, enabling an examination of the heterogeneity of the Carnegie effect. Estimation results show significant reductions in labor supply for recipients of large inheritances. We find that Carnegie effects differ according to transfer size, the recipient’s age and eligibility for other transfer programs, and the existence of new heirs in the family chain.