Household Labor Supply and Welfare Participation in Sweden

We formulate and estimate a structural, static model of household labor supply and multiple welfare program participation. Given the complicated nature of both the income tax schedule and the benefit rules for different welfare programs, we use a detailed micro simulation model to generate accurate budget sets for each work-welfare combination. We also use high-quality data on earnings and other types of incomes obtained both from employers and from income tax records. The results suggest that labor supply among two-parent families in Sweden is quite inelastic. A policy simulation designed to increase labor supply incentives for low income families generated substantial positive welfare effects, despite only minor changes in labor supply and in welfare participation.