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

Author

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  • Keane, Michael P.

    (Johns Hopkins University)

  • Sauer, Robert M.

    (Royal Holloway, University of London)

Abstract

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.

Suggested Citation

  • Keane, Michael P. & Sauer, Robert M., 2006. "Classification Error in Dynamic Discrete Choice Models: Implications for Female Labor Supply Behavior," IZA Discussion Papers 2332, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp2332
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    More about this item

    Keywords

    classification error; discrete choice; fertility; female labor supply; simulated maximum likelihood;
    All these keywords.

    JEL classification:

    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor
    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • D1 - Microeconomics - - Household Behavior

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