Behavioural Response to UI Reform in Constrained and Unconstrained Models of Labour Supply

Abstract

This paper investigates how taking account of demand-side constraints affects estimated models of labor supply and, hence, predicted behavioral responses to unemployment insurance reform in Canada. Constrained and unconstrained labor-supply equations are estimated for single men and women using microdata from the 1982 Survey of Consumer Finance. Detailed modeling of the impact of the Canadian unemployment insurance program on individual budget constraints enables the simulation of behavioral responses to the unemployment insurance reform proposals of the Forget and Macdonald commissions. Results indicate that in a high-unemployment economy, labor-supply responses will be negligible.