Teenage Participation in Economic Activities: True State Dependence or Heterogeneity?

Abstract

In this study, a dynamic model and a twenty-one-year longitudinal data set are used to investigate whether a youth’s past participation in normal economic activities (i.e. schooling or employment) raises his/her probability of being active in normal economic activities in the future. This increase in probability arises either because participation in normal economic activities modifies individual behavior (true state dependence) or because there exist unobserved component correlated over time (heterogeneity). Moreover, we analyze the relationship between the single-parent family structure and parental work patterns and children’s later decisions to participate in normal economic activities. This study finds that being enrolled in school or participating in the labor market, as a form of human capital investment, raises a youth's probability of participating in normal economic activities in the near future even after accounting for unobserved heterogeneity. After controlling for state dependence, we find that poor economic circumstances and stress from family disruption lead to a negative association between a single-parent family structure and the children's later achievements. In contrast, employed parents, who may act as income contributors, job connectors, and role models, are positively associated with children’s later achievements.