Chapter in:
Cathal O’Donoghue, eds., Handbook in Microsimulation Modelling – Contributions to Economic Analysis, Emerald Group Publishing Limited, 2014
DOI:10.1108/S0573-
Abstract:
7.1.1. Microsimulation meets microeconomics
The encounter between microeconometric models of labour supply and the microsimulation approach is the result of a long process. Large microsimulation models, as originally proposed by Orcutt (1957), were meant to be behavioural, although not structural: behavioural responses were typically empirical "reduced form" approximations, with little foundations on standard microeconomic theory (Orcutt, Greenberger, Korbel & Rivlin, 1961). A motivation for the reduced form approach was probably a certain degree of mistrust for mainstream economic theory on the part of Orcutt and his associates. Shortly after, large microsimulation models became increasingly popular at the institutional and policy making level. For good reasons, the main research and implementation efforts were initially focused upon the quality of data, the accuracy of the accounting relationships and representativeness of the results. For many years, the active microsimulation community has considered behavioural responses (and in particular labour supply) either unimportant or unreliable or hard to interpret. Later on, however, various motivations have progressively contributed to a more positive attitude towards the inclusion of labour supply responses into microsimulations models:
(I) The increasing policy interest in tax-benefits reforms, their effect on both distribution and efficiency and the realization that policy analysis requires structural models (a long-standing message from Marshak, 1953, possibly revived by Lucas, 1976)
Full text (PDF)