Income distribution in discrete hours behavioural microsimulation models: An illustration

Abstract

In tax microsimulation models which predict labour supply using a probabilistic discrete hours approach, the analysis of the distribution of income is difficult because, even for a small sample with a modest range of labour supply points, the range of possible combinations over the sample is extremely large. This paper demonstrates the use of a pseudo income distribution, where the probability of a particular labour supply value occurring (standardised by the population size) is used to refer to a particular position in the pseudo income distribution. The superior performance of the pseudo approach compared to using the expected income or taking few draws from the possible set of distributio..