1. Part II Second-Generation Studies of Labor Supply
1) Introduction
2) Wage equation
3) Analysis of labor force participation decision
4) Comparing conditional OLS and Tobit estimates of labor supply
5) Heckman two-stage method

2. 1) Introduction
Major shortcoming of first-generation studies of labor supply: neglecting the selectivity bias (focus on working cohort only)
Data: US, 1975, women

3. Variables WHRS…...labor supply….. hours worked per year in 1975
WA………..age
WE………...education in years
WW………..wage………….hourly wage rate
KL6………number of children less than 6 years old
K618 ……..number of children more than 6 years old and less than 18 years old
LWW = ln(WW)
LWHRS = ln(WHRS)
WA2=(WA^2)/100
AX……….labor market experience in years
CIT……….dummy variable, =1 if live in large city

4. 2) Wage equation Ln(wage)=0+1WA+2(WA)2+3WE+4AX+5CIT

5. 2) Wage equation Ln(wage)=0+1WA+2(WA)2+3WE+4AX

6. Wages of workers vs. non-workers

7. 3) Analysis of labor force participation decision: OLS

8. 3) Analysis of labor force participation decision: OLS

9. Problem with OLS: values of LFP outside the range [0,1]

10. 3) Analysis of labor force participation decision: PROBIT

11. 3) Analysis of labor force participation decision: PROBIT predicted values = probability to work

12. 3) Analysis of labor force participation decision: PROBIT Marginal effects = change in probability to work due to a marginal increase in explanatory variables

13. 3) Analysis of labor force participation decision: LOGIT

14. LOGIT marginal effects

15. 4) Comparing conditional OLS and Tobit estimates of labor supply
Avg.hours(US)<Avg.hours(CZ)
Higher corr(wage,edu) in the US (see next slides)

16. OLS for working women

17. OLS for the whole sample (constructed wages)

18. TOBIT (censored point = 0)

19. 5) Heckman two-stage method

20. 5) Heckman two-stage method