An analysis of the labour supply behaviour of female sole parents in Australia

This thesis investigates the labour supply behaviour of female sole parents in Australia. The major issue explored is the responsiveness of female sole parents to economic incentives, in particular those incentives generated by the interaction of the taxation and social security systems. The methodological framework is given by the neoclassical theory of consumer demand as it relates to the static analysis of labour supply. The estimated labour supply equation derives from direct optimisation of a constant elasticity of substitution utility function, subject to a budget constraint. The estimating equation, therefore, formally includes both individual preferences and economic incentives. The incentive structure facing sole parents in Australia in 1982 is constructed using information on the level and structure of income support provided through the sole parent pension programme in conjunction with the structure of the taxation system. Econometric issues associated with nonlinearities and non-convexities that are introduced into budget sets by the taxation and welfare systems were a major consideration determining the choice of the econometric model. Coefficient estimates are used to derive wage and income elasticities which in turn are used to assess social policy towards sole parents. A wage equation is estimated in order to include individuals observed as not participating in the labour market in the labour supply estimations. Various issues associated with the estimation of female wage equations using Australian data are investigated. The results indicate that coefficient estimates from these equations are sensitive to the measurement of labour market experience. In particular, inappropriate specification of this variable can give an incorrect indication of the degree of censoring bias present in the equation. The major results to emerge from analysis of the labour supply equation concern first, the relatively large degree of responsiveness of female sole parents to economic incentives, in particular to changes in market wages and, second, the significant difference, on average, between reservation and market wages for women not participating in the labour market. The latter of these results is of particular interest as it provides formal empirical support for the existence of high fixed costs of work for these women, and for the importance of these costs in inhibiting labour market entry. This is of general interest as well as being important to the development of policy for sole parents. The evidence for the effects of fixed work costs has been largely anecdotal until now, in particular for women who are welfare dependants. Two policy implications that follow from these results are discussed. First, the strength of the estimated response to economic incentives indicates that elimination of the poverty trap facing sole parents will have a significant impact upon the work efforts of these individuals thus helping to reduce their high level of welfare dependence. Second, as costs associated with childcare are undoubtedly the major work related costs faced by sole parents, increased spending on work related childcare is important if the economic status of female sole parents is to be improved by encouraging self-sufficiency through market work