The Effect of Financial Incentives on Labour Supply: Evidence for Lone Parents from Microsimulation and Quasi‐Experimental Evaluation*

The aim of this paper is to analyse the work incentive effects of a change in the Australian tax and transfer system on lone parents in July 2000. To evaluate the effect of the total change only, microsimulation can be used; but for a subgroup of lone parents, a few components of this policy change can be analysed through two alternative approaches — microsimulation and quasi‐experimental evaluation. Both approaches examine the effects on the probability of employment and on average working hours. The results from microsimulation show that the combined changes introduced in July 2000 — involving reduced withdrawl rates, changed family payments and lower income tax rates — have increased labour supply for lone parents to a moderate extent. The estimated effect on average working hours when using microsimulation is very close to the effect estimated in a quasi‐experimental approach using matching techniques to control for alternative influences.