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Seoul Journal of Economics - Vol. 20 , No. 1
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Seoul Journal of Economics - Vol. 20, No. 1, pp. 59-91
Abbreviation: SJE
ISSN: 1225-0279 (Print)
Print publication date 28 Feb 2007
Received 03 Nov 2006 Revised 16 Dec 2006

A Parametric Test for the Distinction between Unemployed and Out of the Labor Force Statuses
Seung Chan Ahn ; Stuart Low
Associate Professor, Arizona State University, Tempe, AZ 85287-3806, USA (miniahn@asu.edu)
Professor, Arizona State University, Tempe, AZ 85287-3806, USA (Stuart.Low@asu.edu)

JEL Classification: C3, C5, J6

Abstract

Whether or not to empirically consider two (employed versus not employed) or three (employed, unemployed, and out-of-labor-force) classifications in labor supply studies is a controversial issue. We develop a generalized censored probit likelihood function that nests both possibilities. A novelty of this likelihood function is that it allows researchers to test which representation of the labor market is appropriate as well as to estimate the degree to which classification errors may cloud inferences. Our empirical results demonstrate that classifying the three groups is useful to identify individuals’ labor force and employment decisions separately. However, failure to incorporate classification ambiguities may result in unemployed rates that are understated and out-of-labor-force rates that are overstated.

Keywords: Bivariate probit, Misclassification, Unemployment, Out of labor force
Acknowledgments

The authors gratefully acknowledge research support from Arizona State University's Business Dean's Council of 100. We also appreciate comments from Paul Burgess on an earlier draft of this paper. This paper was presented at the 14th Seoul Journal of Economics International Symposium on Sustainable Growth in East Asia, November 2006 and has benefited from suggestions made by two reviewers at that symposium.

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