Optimal Allocation of Time and Estimation of Market Wage Functions

Abstract

Second-generation studies of wage determination are based on the observation that wages of employed workers are a biased sample of the true population values because of selectivity, and a well-known two-stage method to correct for selectivity bias has been proposed by Heckman (1976). The basic notion behind the second-generation approach is that, in a setting of optimal decision making, the individual's choice of market work or not conveys valuable information that can improve our ability to estimate market wage equations. In this paper, we extend second-generation studies by proposing that there is additional useful information for estimating market wage functions in knowing not only if participation occurs, but also knowing how many hours a person actually works in a household sector (as opposed to consuming pure leisure). Accordingly, we extend the conventional work-leisure model of labor supply to accommodate time devoted to household production and adopt an estimation technique that addresses simultaneously the issues of sample censoring and the joint determination of nonmarket returns and nonmarket time. It appears that the disentanglement of the effects of investments in human capital on market and nonmarket productivity lead to sizably higher labor market returns to schooling, tenure, and experience for women than those obtained by standard approaches.