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Welfare Reform, Returns to Experience, and Wages: Using Reservation Wages to Account for Sample Selection Bias

  • Jeffrey Grogger

    (Harris School, University of Chicago)

One rationale for work-focused welfare reform was human capital theory: work today should raise experience tomorrow, which should raise future wage offers and reduce welfare dependency. Yet few studies have estimated the effect of welfare reform on wages. I approach the problem using a novel sample selection estimator based on reservation wage data. Reservation wages solve the selection problem using bivariate censored regression methods without the need for exclusion restrictions. Whereas OLS and conventional sample selection estimates suggest that reform had little effect on wages, the reservation-wage-adjusted estimates suggest that Florida's welfare reform experiment raised wages by about 4%. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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File URL: http://www.mitpressjournals.org/doi/pdf/10.1162/rest.91.3.490
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Article provided by MIT Press in its journal The Review of Economics and Statistics.

Volume (Year): 91 (2009)
Issue (Month): 3 (August)
Pages: 490-502

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Handle: RePEc:tpr:restat:v:91:y:2009:i:3:p:490-502
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  1. David Card & Dean R. Hyslop, 2004. "Estimating the Effects of a Time Limited Earnings Subsidy for Welfare Leavers," NBER Working Papers 10647, National Bureau of Economic Research, Inc.
  2. Heckman, James J, 1979. "Sample Selection Bias as a Specification Error," Econometrica, Econometric Society, vol. 47(1), pages 153-61, January.
  3. David Card & Charles Michalopoulos & Philip K. Robins, 2001. "The Limits to Wage Growth: Measuring the Growth Rate of Wages For Recent Welfare Leavers," NBER Working Papers 8444, National Bureau of Economic Research, Inc.
  4. Light, Audrey & Ureta, Manuelita, 1995. "Early-Career Work Experience and Gender Wage Differentials," Journal of Labor Economics, University of Chicago Press, vol. 13(1), pages 121-54, January.
  5. Hurd, M., 1999. "Anchoring and Acquiescence Bias in Measuring Assets in Households Surveys," Papers 99-02, RAND - Labor and Population Program.
  6. James J. Heckman, 1976. "The Common Structure of Statistical Models of Truncation, Sample Selection and Limited Dependent Variables and a Simple Estimator for Such Models," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 5, number 4, pages 475-492 National Bureau of Economic Research, Inc.
  7. Newey, Whitney K., 1987. "Efficient estimation of limited dependent variable models with endogenous explanatory variables," Journal of Econometrics, Elsevier, vol. 36(3), pages 231-250, November.
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