Visiting Speaker Seminar: André Decosta, Department of Economics, KU Leuven - "Some Insights from an Estimated Random Utility/Random Opportunity Model on Belgian Data"

Abstract

This paper exploits the distinction between preference and opportunity factors in a Random Utility and Random Opportunity (RURO) model of job choice (Aaberge, Dagsvik and Strøm, 1995, and Aaberge, Colombino and Strøm,1999), estimated on Belgian data (SILC 2007). We explain the attractiveness of using the rich structural specification of the RURO-model as compared to a standard discrete choice model à la Van, Soest (1995) by means of two applications. In the first application, we investigate to what extent lower labour market participation of elderly is due to changing preferences or differences in opportunities, by simulating two counterfactuals. First, we remove partly the age heterogeneity in opportunities. Then we remove age heterogeneity in preferences. A comparison of labour market behaviour in these two counterfactuals shows that opportunities which decline with age are at least as an important factor in explaining low participation rates for the elderly, as is increasing preference for leisure. The effect of opportunities seems to work primarily through the extensive margin, whereas the effect of preferences is more outspoken in the intensive than in the extensive margin. In the second application we evaluate the effects of a recently enacted Belgian tax shift, of which the first measures came into force as from 2016. The overall package of policy reforms is substantial: gradual phasing out of the 30% tax bracket of the personal income tax, expansion of tax deductible professional expenses, intensification of the existing in-work benefit structure and lowering of social security contributions. The reform is to a large extent financed through VAT harmonisation and excise tax hikes. The potential outcome in terms of labour supply choices and inequality can be expected to be considerable. We use the recently developed VAT/indirect taxation module inside EUROMOD in combination with the RURO-model to undertake an ex-ante evaluation of the policy shift. Next to the standard analysis of labour market effects of the reform, we also explore whether the defining characteristic of this type of job choice model, i.e. the introduction of aspects of labour demand into the structural specification, allows us to integrate the effects of the substantial lowering of the socialsecurity contributions for the employers into the analysis.