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

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  • Jeffrey Grogger

Abstract

Work was one of the central motivations for welfare reform during the 1990s. One important rationale for work was based on human capital theory: work today should raise experience tomorrow, which in turn should raise future wage offers and reduce dependency on aid. Despite the importance of the this notion, few studies have estimated the effect of welfare reform on wages. Furthermore, several recent analyses suggest that low-skill workers, such as welfare recipients, enjoy only meager returns to experience, undermining the link between welfare reform and wages. An important analytical obstacle is the sample selection problem. Since non-employment levels are high and workers are unlikely to represent a random sample from the population of former recipients, estimates that fail to account for sample selection could be seriously biased. In this paper, I propose a method to solve the selection problem based on the use of reservation wage data. Reservation wage data allow one to solve the problem using censored regression methods. Furthermore, the use of reservation wage data obviates the need for the controversial exclusion restrictions sometimes used to identify familiar two-step sample selection estimators. Correcting for sample selection bias matters a great deal empirically. Estimates from models that lack such corrections suggest that welfare recipients gain little from work experience. Estimates based on the reservation wage approach suggest that they enjoy returns similar to those estimated from other samples of workers. They also suggest that the particular reform program that I analyze may have raised wages modestly.

Suggested Citation

  • Jeffrey Grogger, 2005. "Welfare Reform, Returns to Experience, and Wages: Using Reservation Wages to Account for Sample Selection Bias," NBER Working Papers 11621, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:11621
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    References listed on IDEAS

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    1. 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.
    2. 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.
    3. David Card & Dean R. Hyslop, 2005. "Estimating the Effects of a Time-Limited Earnings Subsidy for Welfare-Leavers," Econometrica, Econometric Society, vol. 73(6), pages 1723-1770, November.
    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 121-154, January.
    5. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
    6. 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.
    7. Hurd, Michael D, 1999. "Anchoring and Acquiescence Bias in Measuring Assets in Household Surveys," Journal of Risk and Uncertainty, Springer, vol. 19(1-3), pages 111-136, December.
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    Citations

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    Cited by:

    1. Cockx, Bart & Robin, Stéphane R. & Goebel, Christian, 2006. "Income Support Policies for Part-Time Workers: A Stepping-Stone to Regular Jobs? An Application to Young Long-Term Unemployed Women in Belgium," IZA Discussion Papers 2432, Institute for the Study of Labor (IZA).
    2. B. Cockx & C. Goebel & S. Robin, 2009. "Is income support for part-time workers a steppingstone to regular jobs? An application to young long-term unemployed women," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 09/561, Ghent University, Faculty of Economics and Business Administration.
    3. Hansen Jorgen, 2007. "Human Capital and Welfare Dynamics in Canada," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 7(1), pages 1-29, June.
    4. Jeffrey Zabel & Saul Schwartz & Stephen Donald, 2013. "An analysis of the impact of the self-sufficiency project on wages," Empirical Economics, Springer, vol. 44(1), pages 231-259, February.
    5. Greenberg, David H. & Robins, Philip K., 2008. "Incorporating nonmarket time into benefit-cost analyses of social programs: An application to the self-sufficiency project," Journal of Public Economics, Elsevier, vol. 92(3-4), pages 766-794, April.
    6. Bart Cockx & Christian Goebel & Stéphane Robin, 2013. "Can income support for part-time workers serve as a stepping-stone to regular jobs? An application to young long-term unemployed women," Empirical Economics, Springer, vol. 44(1), pages 189-229, February.
    7. Jill Fitzpatrick & Julie L. Hotchkiss, 2009. "Job Separation Outcomes Of Welfare Hires: Insight From Linked Personnel And State Administrative Data," Contemporary Economic Policy, Western Economic Association International, vol. 27(2), pages 137-146, April.
    8. Jill Marie Gunderson & Julie L. Hotchkiss, 2006. "Welfare recipiency, job separation outcomes, and postseparation earnings: insight from linked personnel and state administrative data," FRB Atlanta Working Paper 2006-07, Federal Reserve Bank of Atlanta.

    More about this item

    JEL classification:

    • I3 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables

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