2.2 Unobserved Wages
Like other researchers in this area, we have to deal with unobserved market wages for people who are not working. In this paper, we use the popular approach of estimating the wage equation separately and using estimated wages as if they represented the true values of the unobserved wages[6]. To correct for a possible selection bias as a result of only observing wage rates for those gainfully employed the Heckman correction term for participation is included in the wage equation (Heckman, 1979). Estimating wages and labour supply simultaneously is computationally more demanding and it is not attempted very often[7].
Separate wage equations have been estimated for the five demographic groups. The specification of the wage equation is discussed in a separate paper (Kalb and Scutella, 2003). For each non-participant we impute an expected value for the wage rate in the labour supply model. Some observed values for wage income seem unrealistically small when compared to the corresponding hours worked. In the estimation of the labour equation in this paper, the observed wage level for all persons earning less than half the minimum wage or more than $100 per hour have been replaced by the predicted value[8] as such low and high values seem likely to be due to measurement error[9]. Over the years the minimum wage levels varied. See Table A.1 in the appendix for the relevant minimum wage levels.
Notes
- [6]Van Soest (1995) uses this approach and points out that most of the papers in a special issue on Taxation and Labor Supply in Industrial Countries of the Journal of Human Resources (Moffitt, 1990) follow this approach as well. An alternative approach is to use imputed values for all individuals in the sample.
- [7]Exceptions are for example Fraker and Moffitt (1988), Gerfin (1993) and Murray (1996).
- [8]17 sole parents, 51 single men, 27 single women, 71 married men and 132 married women fall into this group.
- [9]None of the imputed wage rates fall into this category of wages that seem too low or too high.
