Estimation and Specification in Labor Supply
and Consumption Models

Abstract
This chapter is concerned with the identification and estimation of models
of labor supply and consumption. The focus is on the key issues that
arise from unobserved heterogeneity and nonparticipation. We examine
the simple ‘static’ labor supply model with proportional taxes and highlight
the problems surrounding nonparticipation and missing wages. We
also consider difference in differences approach to estimation and identification.
We consider the impact of incorporating nonlinear taxation and
welfare programme participation and on family labor supply. Finally we
consider intertemporal models focusing on the difficulties that arise with
participation and heterogeneity.