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Quadratic utility, labour supply and the welfare effects of tax changes

Author

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  • John Creedy

    (University of Melbourne)

Abstract
This paper examines the use of the quadratic direct utility function in modelling labour supply behaviour. This function has been used in recent empirical studies of labour supply. Emphasis is given to the treatment of welfare changes, involving the derivation of the expenditure function. A convenient expression for the Slutsky condition is also obtained. In examining welfare changes, special attention is given to possible movements to or from corner solutions, since these involve the use of virtual wages rather than observed net wages. In addition, changes in tax parameters can have income and price effects, in view of the endogeneity of the net (or virtual) wage rate and virtual income when faced with piecewise-linear budget constraints. Numerical examples illustrate the effects of tax changes on compensating and equivalent variations.

Suggested Citation

  • John Creedy, 2000. "Quadratic utility, labour supply and the welfare effects of tax changes," Australian Journal of Labour Economics (AJLE), Bankwest Curtin Economics Centre (BCEC), Curtin Business School, vol. 4(4), pages 270-278, December.
    • Handle: RePEc:ozl:journl:v:4:y:2001:i:4:p:270-278
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    Cited by:

    1. John Creedy & Nicolas Hérault & Guyonne Kalb, 2007. "Comparing Welfare Change Measures with Income Change Measures in Behavioural Policy Simulations," Melbourne Institute Working Paper Series wp2007n21, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    2. Creedy, J. & Kalb, G., 2001. "Measuring Welfare Changes With Nonlinear Budget Constraints in Continuous and Discrete Hours Labour Supply Models," Department of Economics - Working Papers Series 799, The University of Melbourne.

    More about this item

    Keywords

    Time allocation and labour supply (hours of work; part-time employment; work sharing; absenteeism;
    All these keywords.

    JEL classification:

    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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