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The accuracy of predicted wages of the non-employed and implications for policy simulations from structural labour supply models

Author

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  • Robert Breunig

    (Treasury, Government of Australia and Research School of Economics, Australian National University)

  • Joseph Mercante

    (Treasury, Government of Australia)

Abstract

The main focus of this paper is on the accuracy of predicted wages for the nonemployed. We first examine whether the three groups of non-employed–the unemployed, the marginally attached, and the not in the labour force–should be modelled separately or together. We conclude that these are three distinct states and that they should not be pooled in modelling wages. We predict wages separately for the three non-employed groups using a range of two-state and four-state sample selection models.We predict wages separately for the three non-employed groups using a range of two-state and four-state sample selection models. Using a panel data set from Australia, we test the accuracy of predicted wages for the non-employedby focusing on those individuals who subsequently enter employment. We find that conditional predictions, which incorporate the estimated sample selection correction, perform poorly for all groups, especially for the marginally attached and the not in the labour force. Unconditional predictions from the sample selection models perform better but never out-perform a simple linear regression. These results may have important implications for policy simulations from structural labour supply models.

Suggested Citation

  • Robert Breunig & Joseph Mercante, 2009. "The accuracy of predicted wages of the non-employed and implications for policy simulations from structural labour supply models," Treasury Working Papers 2009-03, The Treasury, Australian Government, revised Mar 2009.
  • Handle: RePEc:tsy:wpaper:wpaper_tsy_wp_2009_3
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Zuzana Siebertova & Matus Senaj & Norbert Svarda & Jana Valachyova, 2013. "To Work or Not to Work? Estimates of Labour Supply Elasticities," Working and Discussion Papers WP 5/2013, Research Department, National Bank of Slovakia.
    2. Matus Senaj & Zuzana Siebertova & Norbert Svarda & Jana Valachyova, 2016. "Labour Force Participation Elasticities: the Case of Slovakia," Working Papers Working Paper No. 1/2016, Council for Budget Responsibility.
    3. Robert Breunig & Xiaodong Gong & Anthony King, 2012. "Partnered Women's Labour Supply and Child‐Care Costs in Australia: Measurement Error and the Child‐Care Price," The Economic Record, The Economic Society of Australia, vol. 88(s1), pages 51-69, June.
    4. Robert Breunig & Andrew Weiss & Chikako Yamauchi & Xiaodong Gong & Joseph Mercante, 2011. "Child Care Availability, Quality and Affordability: Are Local Problems Related to Labour Supply?," The Economic Record, The Economic Society of Australia, vol. 87(276), pages 109-124, March.
    5. repec:sav:ebooks:003 is not listed on IDEAS
    6. Xiaodong Gong & Robert Breunig, 2010. "Child care availability, quality and affordability: are local problems related to maternal labour supply ?," Treasury Working Papers 2010-02, The Treasury, Australian Government, revised Apr 2010.
    7. Rachel Ong & Gavin Wood & Melek Cigdem, 2013. "Work incentives and decisions to remain in paid work in Australia," Bankwest Curtin Economics Centre Working Paper series WP1312, Bankwest Curtin Economics Centre (BCEC), Curtin Business School.
    8. Zuzana Siebertova & Matus Senaj & Norbert Svarda & Jana Valachyova, 2015. "To Work or Not to Work? Updated Estimates of Labour Supply Elasticities," Working Papers Working Paper No. 3/2015, Council for Budget Responsibility.
    9. Norbert Švarda, 2016. "Labour Force Participation Elasticities and Move Away from the Flat Tax: the Case of Slovakia," Discussion Papers 41, Central European Labour Studies Institute (CELSI).
    10. Joseph Mercante & Penny Mok, 2014. "Estimation of wage equations for New Zealand," Treasury Working Paper Series 14/09, New Zealand Treasury.
    11. Li Tan & Cory Koedel, 2017. "The Effects of Differential Income Replacement and Mortality on U.S. Social Security Redistributions," Working Papers 2017-01, Department of Economics, University of Missouri, revised Feb 2018.
    12. Rebecca Brown & Tue Gørgens, 2009. "Corporate governance and financial performance in an Australian context," Treasury Working Papers 2009-02, The Treasury, Australian Government, revised Mar 2009.

    More about this item

    Keywords

    labour supply; selection bias; multinomial logit; wage predictions;

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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