Lifecycle-consistent female labor supply with nonlinear taxes: evidence from unobserved effects panel data models with censoring, selection and endogeneity

Abstract

This paper uses the Panel Study of Income Dynamics (PSID) from 1979 to 2007 to estimate within-period lifecycle-consistent labor supply elasticities of US females in a two-stage budgeting framework. The paper combines a variety of econometric approaches to estimate unobserved effects panel data models with censoring, selection and endogeneity. The paper finds evidence of substantial upward bias in estimated wage elasticities from pooled panel models which do not account for unobserved effects, as fixed effects and correlated random effects (CRE) specifications yield smaller elasticities. Estimates are also somewhat sensitive to using a lifecycle-consistent specification versus a standard static model. The lifecycle-consistent wage elasticity from a CRE model with instrumental variables is 0.56 on the extensive margin and 0.31 on the intensive margin for an overall wage elasticity of 0.87. The standard static model, on the other hand, yields a wage elasticity of 0.46 on the extensive margin and 0.13 on the intensive margin for an overall elasticity of 0.59.