Estimating the Labor Supply Effects of a Negative Income Tax

and particularly to Stanley Masters for many helpful criticisms and suggestions. At least one-half of the good ideas in the text should probably be attributed to Masters. I have discussed the study so often and in such great detail with him that it is impossible at this point for me to distinguish clearly which particular suggestions originated with him. Finally, I am indebted to Gordon Wilson for research and programming assistance. I take full responsibility, however, for any errors or shortcomings. / Introduction Several studies have used labor supply schedules derived from cross-sectional data to estimate the potential labor supply effects of enacting a negative income tax. The range of estimates in these studies is enor-1 mous. That competent economists can derive such divergent results suggests that the issue is extremely complex. Consequently in this paper I will focus on the methodological problems of deriving labor supply schedules which can be used to simulate labor supply effects of negative income tax programs. For two reasons, this study is incomplete. First, some of the procedures used in the study are less than ideal. 2 Second, I concentrate on deriving the labor supply schedule of married prime-age, able-bodied males. Since other demographic groups may reduce their labor supply in response to an NIT, this study cannot provide an estimate of total labor supply effects. There are, however, at least two good reasons for focusing on this one particular demographic group.3 Married prime-age, able-bodied males are of particular interest because they contribute such a large percentage of existing labor supply. More important, what distinguishes current negative income tax proposals, including Nixon's FAP proposal, from existing welfare programs is that coverage would be extended to the able-bodied working poor. Opposition to NIT proposals stems primarily from the fear that transfers to the working poor will result in very large labor supply reductions. While this paper is less than a comprehensive labor supply study, therefore, it can provide evidence to support or reject the controversial hypothesis of substantial labor supply reductions of the able-bodied, prime-age, male-working poor. In the first section I discuss the model and data used in this study. Normally, in an empirical study the author then presents his rationale for choosing to operationalize his model with particular dependent and independent variables in preference to others. Because the issues are so complex and intertwined, however, in this paper I reverse the procedure in …