Enhancing tax-benefit modelling functionality: Labour supply responses in UKMOD

Authors

Justin van de Ven, Matteo Richiardi, Natasha Brooks, Daria Popova

Publication Date

Mar 2026

Abstract

This paper describes the integration of labour supply behavioural responses into UKMOD, the UK tax-benefit microsimulation model belonging tothe EUROMOD family. Traditional static models quantify only the direct (“morning after”) fiscal and distributional effects of policy reforms, abstracting from behavioural adjustment. We outline a practical framework for extending such models to incorporate indirect effects, with a focus on labour supply responses at both the intensive and extensive margins.After reviewing the evolution of the empirical literature on labour supply elasticities and the distinction between structural and reduced-form approaches, we motivate the adoption of an elasticity-based reduced-form method. While structural random utility models offer theoretically consistent counterfactual analysis, they are computationally demanding and less transparent for routine policy work. By contrast, externally estimated elasticities - widely used by UK institutions - provide a tractable and policy-aligned alternative.We detail the design of the Behavioural Responses (BVR) add-on introduced in UKMOD in 2023. The module computes marginal and average effective tax rates, distinguishes responses to changes in marginal versus average rates, and applies assumed taxable income elasticities to generate post-reform behavioural adjustments. Implementation requires a limited number of simulation loops and preserves transparency and computational efficiency.

Publication type

CeMPA Working Paper Series

Series Number

CEMPA4/26

Research area

Tax and benefit systems

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