Empirical life cycle models of labour supply and - Statistisk sentralbyrå

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Social and Economic Studies 91 Empirical Life Cycle Models Table 2: FIML estimatest for the subutility. Constant Age Children 7 Constant Age 32.237 -0.0051 0.0565 -2.228 20.179 -0.0048 -0.8791 (26.496) (0.0053) (0.0408) (2.999) (11.950) (0.0033) (1.3955) zoS o- 30241.9 0.0333 0.9558 (31029.4) (0.0662) (0.0359) t Standard errors in parentheses. t The number of children with age less than 21 years. in light of the fact that none of these estimates are determined precisely. The sign of the estimate of the coefficient on children indicates that females' preferences for leisure increase with an increase in the number of children. The marginal rate of substitution between female leisure and the composite good then increases, and female labour supply decreases. The estimate is within about one standard error of the estimate of Heckman and MaCurdy (1980), but it is imprecise. The estimates for 7 and co are not significantly different from zero. We do not have knowledge of similar studies using Norwegian data, and cannot use this sort of information for claiming that these parameters are different from zero. Both estimates are, however, consistent with the results in Aaberge, Dagsvik and Strom (1990), although they use a static and somewhat different model specification. The estimate for -y is also consistent with the results in Heckman and MaCurdy (1982). The implications of the finding that 7 and ca are not significantly different from zero, are then ambiguous, in particular when we consider that the sample is small. Both estimates are consistent with the assumption of a strict concave utility function. Since the absolute value of 7 exceeds that of w, the estimates also imply that male labour supply is more responsive to wage changes than female labour supply, cf. the first order conditions (130) and (131). This result seems to be in contrast with most empirical findings, which indicate that female labour supply is most responsive to wage changes. If we look at the estimates of the parameters related to the preferences over the composite good, we notice that the standard errors of both zo and st, exceed the 93
Empirical Life Cycle Models Social and Economic Studies 91 absolute value of the parameter estimates. These results do not support our theory that there is psychological depreciation in the consumption of durables, but again we should recall that the sample is small. The reason for introducing zip implies that A) should be greater than zero. In contrast to all the other estimates, the estimate for a is very precise. It is consistent with the assumption that preferences are strictly concave. Since there are no other studies that use our specification of the composite good Z, this result must be compared with the result of studies33 that use the standard consumption measure, cf. section 3.2.1. MaCurdy (1983) includes imputed service flow for durables in the consumption measure, and finds that the parameter corresponding to a is 0.34, with standard error equal to 0.21. It remains to present the estimates from the estimation of the Euler equation (134), cf. table 3. Notice that the standard errors in this table do not account for the dependence of the variable in(Ut+i/Ut) on estimated quantities. Table 3: ML estimationt of the monotonic transformation. P 0.0663 (0.8881) (0.0026) (0.0682) t The asymptotic standard errors in parenthesis are not adjusted for the use of the instruments. In this case, the estimates for p and O are both statistically significant. The estimate for 0 implies that 0 — 1 is negative - 0.112), and this result is consistent with risk averted households. 3.8 Summary This chapter formulates and estimates a life cycle model of labour supply and consumption of durables and non-durables for married couples in an environment of uncertainty and personal income taxes. While standard economic theory assumes that preferences are exogenously determined, we respond to the fact that many empirical studies have presented evidence in favour of utility being a relative concept, by specifying preferences subject to a reference standard. According to Boyer (1983), the authors of these studies generally argue that although the assumption of given preferences can be reasonable in the short run, in a life cycle perspective it should be challenged. The lack of a well-established economic theory of habit formation, however, 33The estimate for a is very similar to the result in the (static) model of Aaberge, Dagsvik and Strom (1990). 94
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