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Classification Error in Dynamic Discrete Choice Models: Implications for Female Labor Supply Behavior

  • Keane, Michael P.


    (University of Technology, Sydney)

  • Sauer, Robert M.


    (Royal Holloway, University of London)

Two key issues in the literature on female labor supply are: (1) if persistence in employment status is due to unobserved heterogeneity or state dependence, and (2) if fertility is exogenous to labor supply. Until recently, the consensus was that unobserved heterogeneity is very important, and fertility is endogenous. But Hyslop (1999) challenged this. Using a dynamic panel probit model of female labor supply including heterogeneity and state dependence, he found that adding autoregressive errors led to a substantial diminution in the importance of heterogeneity. This, in turn, meant he could not reject that fertility is exogenous. Here, we extend Hyslop (1999) to allow classification error in employment status, using an estimation procedure developed by Keane and Wolpin (2001) and Keane and Sauer (2005). We find that a fairly small amount of classification error is enough to overturn Hyslop’s conclusions, leading to overwhelming rejection of the hypothesis of exogenous fertility.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2332.

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Length: 43 pages
Date of creation: Sep 2006
Date of revision:
Publication status: published in: Econometrica, 2009, 77(3), 975-991
Handle: RePEc:iza:izadps:dp2332
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  19. Jeffrey M Wooldridge, 2002. "Simple solutions to the initial conditions problem in dynamic, nonlinear panel data models with unobserved heterogeneity," CeMMAP working papers CWP18/02, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
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