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Nonlinearity in dynamic adjustment: Semiparametric estimation of panel labor supply

  • Qi Li

    (Department of Economics, Texas A&M University, College Station, TX 77843, U.S.A.)

  • Thomas J. Kniesner

    (Center for Policy Research, 426 Eggers Hall, Syracuse University, Syracuse, NY 13244-1020, U.S.A.)

We estimate a semiparametric dynamic panel data model by the local linear kernel method and we interpret the slope of the nonparametric component function as a varying slope coefficient. Thus, the slope coefficient is a smooth, but otherwise unknown, function of some of the regressors. A Monte Carlo experiment is reported to examine the finite sample performance of the local linear estimator. We apply the estimation method to a labor supply equation for men from the triannual Survey of Income and Program Participation (SIPP). Specification tests based on the estimated labor supply elasticities, partial adjustment coefficients, and residuals demonstrate the improvements from a semiparametric partially linear model. Our empirical results point to a need by economists to revisit the issue of the speed of labor market adjustment to policy induced shifts in labor demand and to take more formal econometric account of heterogeneity in wage effects when studying the distributional consequences of tax reforms for labor supply earnings.

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Article provided by Springer in its journal Empirical Economics.

Volume (Year): 27 (2002)
Issue (Month): 1 ()
Pages: 131-148

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Handle: RePEc:spr:empeco:v:27:y:2002:i:1:p:131-148
Note: received: July 2000/Final version received: January 2001
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