Earnings Equations Research Articles

Sequentially Testing Polynomial Model Hypotheses Using Power Transforms of Regressors

We provide a methodology for testing a polynomial model hypothesis by extending the approach and results of Baek, Cho, and Phillips (2015; Journal of Econometrics; BCP) that tests for neglected nonlinearity using power transforms of regressors against arbitrary nonlinearity. We examine and generalize the BCP quasi-likelihood ratio test dealing with the multifold identification problem that arises under the null of the polynomial model. The approach leads to convenient asymptotic theory for inference, has omnibus power against general nonlinear alternatives, and allows estimation of an unknown polynomial degree in a model by way of sequential testing, a technique that is useful in the application of sieve approximations. Simulations show good performance in the sequential test procedure in identifying and estimating unknown polynomial order. The approach, which can be used empirically to test for misspecification, is applied to a Mincer (1958, 1974) equation using data from Card (1995). The results confirm that Mincer’s log earnings equation is easily shown to be misspecified by including nonlinear effects of experience and schooling on earnings, with some flexibility required in the respective polynomial degrees.

A double-hurdle analysis of the gender earnings gap for working children in Bangladesh

Child labor continues to be pervasive throughout the developing world. Although the number of child workers has declined, the ILO’s 2010 estimate remained at 215 million children. An estimated 100 million girls are involved in child labor, often for low pay. Girls are often engaged in some of the worst forms of child labor, sometimes in illegal activities such as prostitution. Studies regarding the gender earnings gap among adults are abundant, but there is very little economic research on girls’ unequal treatment in the labor market in terms of pay. In this paper, we measure and analyze the gender earning gap between working boys and girls in Bangladesh, those who are paid as well as those who receive no pay. In order to investigate the gender gap in the earnings of children, we use the 2002-03 National Child Labour Survey of Bangladesh and limit our analysis to children ages 5 through 14, yielding 50,263 cases. Of these children, 6,668 performed market work; 2,283 were paid for their work and 4,385 were unpaid workers. We present descriptive statistics and then apply the Double-Hurdle model to adjust for selectivity bias and to include the working children who do not earn a wage. We then estimate Mincerian earnings equations for a pooled sample of children who perform market work, using four alternative models. We find evidence of a significant gender earnings gap in the overall child labor market in Bangladesh with a raw earnings gap of 36 percent. We specify four alternative Double-Hurdle regression models in which we include alternative sets of independent variables. All four models show a statistically significant wage gap ranging in magnitude from 31 percent to 29 percent. The magnitude of the gap is large, due mainly to a greater proportion of girls in unpaid work. A child’s own characteristics, family characteristics, as well as industrial segregation play important roles in explaining the gap. Girls’ earnings remain well below boys’ earnings even when all measured characteristics are included in the analysis. Our results show that the concentration of girls’ in unpaid work contributes to the earnings gap, yet we understand the importance of part-time (often unpaid) work in allowing girls to pursue their education. Policies are needed that encourage both educational and employment opportunities for girls in safe environments.

The Impact of Pension System Reform on Projected Old-Age Income: The Case of Poland

This paper analyses the distributional effects of the Polish old‐age pension reform introduced in 1999. Following a benchmark Mincer earnings equation, and using a newly developed microsimulation model we project future pension benefits for males born in years 1969‐1979. We find that inequality of predicted first pension benefits measured by the Gini coefficient increases from 0.119 to 0.165 for cohorts of men retiring between 2036 and 2046. The observed increased inequality of pension benefits is due to the decreasing share of initial capital that is based on a more generous DB formula in the total accumulated pension capital. At the same time, inequality in replacements rates decreases due to a stronger link between contributions paid through the entire working life and pension benefits.

INCOME INEQUALITY IN THE URBAN AND RURAL SECTORS OF THE NORTHEAST REGION OF BRAZIL

In this study, we conduct an analysis of the main determinants of personal income inequality in both urban and rural areas of the Northeast region of Brazil. An earnings equation was estimated and the Shapley value was used in its decomposition. The results show that education and worker experience are the most relevant variables to explain the high index of inequality in earnings in both the rural and urban areas of the Northeast region of Brazil. Moreover, discrimination in the labor market is also an important factor to explain the concentration of income in the rural sector.

Patterns of earnings differentials across three conservative European welfare regimes with alternative education systems

The aim of this paper is to investigate, from a generational perspective, the effect of human capital on individual earnings and earnings differences in Germany, France and Italy, three developed countries in Western Europe with similar conservative welfare regimes but with important differences in their education systems. Income inequalities between and within education levels are explored using a two-stage probit model with quantile regressions in the second stage. More precisely, drawing upon 2005 EU-SILC data, returns on schooling and experience are estimated separately for employees and self-employed full-time workers by means of Mincerian earnings equations with sample selection; the sample selection correction accounts for the potential individual self-selection into the two labour force types. Although some determinants appear to be relatively similar across countries, state-specific differentials are drawn in light of the institutional features of each national context. The study reveals how each dimension of human capital differently affects individuals’ earnings and earnings inequality and, most of all, how their impacts differ along the conditional earnings distribution and across countries. In the comparative perspective, the country's leading position in terms of the highest rewards on education also depends on which earnings distribution (employee vs. self-employed) is analysed.

FUZZY APPROACH TO DISCRETE DATA REDUCTION: AN APPLICATION IN ECONOMICS FOR ASSESSING THE SKILL PREMIUM

Measures of stock of skills alternative to human capital have raised fresh difficulties, especially in data managing. We propose to empirically compare the efficiency of a hierarchical cluster analysis and a fuzzy clustering in reducing discrete skill data. The outcomes of both methods are subsequently used to measure the impact of skills on earnings in addition to human capital. The proposed methodological comparison was made using an original dataset of retail bankers’ skills assessed by supervisors. Empirical evidence shows that the fuzzy approach is more efficient than the hierarchical clustering: the resulting clusters are fewer and easier to interpret. Furthermore, the earnings equation enriched with skill variables allowed us to correct the education premium, and provides information on monetary incentives related to individual skills. Our paper attempts to raise researchers’ and practitioners’ awareness of data reducing methods, and their implications for wage determinants.

Attrition Bias in Panel Data: A Sheep in Wolf's Clothing? A Case Study Based on the Mabel Survey.

This paper investigates the nature and consequences of sample attrition in a unique longitudinal survey of medical doctors. We describe the patterns of non-response and examine if attrition affects the econometric analysis of medical labour market outcomes using the estimation of physician earnings equations as a case study. We compare the econometric gestimates obtained from a number of different modelling strategies, which are as follows: balanced versus unbalanced samples; an attrition model for panel data based on the classic sample selection model; and a recently developed copula-based selection model. Descriptive evidence shows that doctors who work longer hours, have lower years of experience, are overseas trained and have changed their work location are more likely to drop out. Our analysis suggests that the impact of attrition on inference about the earnings of general practitioners is small. For specialists, there appears to be some evidence for an economically significant bias. Finally, we discuss how the top-up samples in the Medicine in Australia: Balancing Employment and Life survey can be used to address the problem of panel attrition.

Distribution of the gender wage gap with endogenous human capital: evidence for Spain

Purpose – The purpose of this paper is to provide empirical evidence on gender wage discrimination and how it is distributed among women in the Spanish labour market, where female participation has been rising for decades. The empirical approach aims to assess to which extent discrimination is evenly distributed or not among women, and how different subgroups of workers are affected by it. Design/methodology/approach – Using data from the Spanish section of the European Community Household Panel (1994-2001) the authors estimate earnings equations for men and women using the instrumental variable (IV) method proposed by Hausman and Taylor (1981). This aims to avoid biases resulting from endogeneity of regressors. Building on these results, the authors follow the proposal of Jenkins (1994) and estimate a bivariate wage distribution for women, containing individual expected earnings with and without discrimination. Findings – The results show that discrimination is distributed unevenly across female workers and that the degree to which women are discriminated against grows as they move upward in the wage distribution. Also, when wage determinants are allowed to be endogenous, the results experience drastic changes, both in average and distributional terms. Research limitations/implications – The results point to a “glass ceiling” operating on female earnings and also show that endogeneity of human capital should be taken into account when analysing discrimination. Therefore, more empirical evidence in this line would be welcome. Originality/value – By using IV estimation of wages, the authors control for the existence of endogeneity in earnings equations. Also, the authors provide unexplained wage differentials for particular groups of female wage earners, specially according to education, experience and job tenure.

Sheepskin and Working Experience Effects on Wage in Indonesia: The Importance of Signalling

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Self‐Employment and Queues for Wage Work: Evidence from Chile

AbstractSelf‐employment can be considered as either the result of a self‐selection process or a reflection of rigidities and skill mismatch in the labour market or both. We estimate a double selection model where individuals queue for wage work instead of being self‐employed in the first stage, followed by employers selecting from the queue in the second. We find statistical support for the double selection model, implying that some individuals are self‐employed because they cannot find wage work, while other self‐select to be self‐employed. Individuals with higher education are more often chosen as wage workers, and belonging to an ethnic group decreases the likelihood of being chosen. Additionally, earnings equations suggest that high ability individuals perform better in both the wage work and self‐employment sectors. Copyright © 2015 John Wiley & Sons, Ltd.

Determinants of Earnings and Selection into Labor Market by Controlling Selection Bias in Bangladesh

This paper uses the data of Household Income and Expenditure Survey (HIES) 2005 to estimate the determinants of earnings and selection into labor market in Bangladesh. We deal with the selection bias in earnings by using a maximum likelihood system of equations, and a multinomial selection approach is used modeling for selection into the labor market. By instrumenting years of schooling in both the multinomial selection approach and the earnings equations, we deal with reverse causality between educational attainment and earnings. We find that the estimated parameters of the earnings equation under multinomial selection approach differs from ordinary least square (OLS) estimates and a binomial selection procedure. The estimated parameters that vary the most with those related variables have the strongest impact on multinomial selection into the different labor-market statuses. We also find that workers with higher educational attainment are more likely to search out a salaried employees’ job, which non-salaried work is as another to inactivity. DOI: http://dx.doi.org/10.3329/dujs.v62i1.21953 Dhaka Univ. J. Sci. 62(1): 11-16, 2014 (January)

Estimating Historical Wage Profiles

. In this article, researchers evaluate the empirical performance of the Mincer earnings equation, which has been the benchmark model for assessment of wage profiles since 1974. The analysis concerns workers in the manufacturing industry in three countries before 1900. The Mincer equation must be adjusted with respect to functional form in order to capture the wage profiles of past industrial workers. The quadratic spline consistently provides the best fit, while the standard quadratic produces misleading estimates of wage changes and gender wage gaps. These conclusions hold across contexts, for men and women, and for both age and experience profiles. The results have methodological relevance for estimating historical wage profiles and also have implications for the assessment of gender wage gaps in the past.

Determinants of Urban Worker Earnings in Ghana: The Role of Education

The paper examines the role of education in earnings determination by using all three rounds of the Urban Worker Survey of Ghana for 2004-2006 conducted by CSAE. The analysis is begun by investigating and comparing heterogeneity in earnings determinants amongst self-employed (informal sector), private sector workers and public sector workers with particular focus on education. An examination of the role education, individual and household characteristics play in facilitating entry into employment sectors is further undertaken in a multinomial logit model of occupational attainment in addition to analyzing the pattern of returns to education along the earnings distribution. After addressing biases associated with estimating earnings equations, it is observed that education plays an important role in promoting access to lucrative formal sector jobs, especially employment in the public sector but has no direct impact on earnings within the sector.

The Evolution of Income Distribution in Brazil in the Agricultural and the Non-agricultural Sectors

The paper analyzes the characteristics and evolution of income distribution in the Brazilian agricultural sector, comparing it with the overall distribution or with the non-agricultural sector, considering two dimensions: the per capita household income and the income of occupied persons. The main data source is the National Household Sample Survey (PNAD). In order to fulfill this purpose, the per capita household income was divided into nine components (for Brazil and considering only the agricultural households) to evaluate their contributions to the decrease in inequality. In the second part, the paper analyzes the characteristics of occupied persons and the determining factors of their income, always comparing the agricultural and non-agricultural sectors. The estimated effects were analyzed over the period 1992-2012, adjusting one earnings equation for each year. In both cases (per capita household income and earnings of occupied persons), the agricultural sector showed a markedly different behavior. Regarding the per capita household income, though from 2001 to 2009 the rate of reduction in inequality among agricultural households is similar to the one observed in Brazil as a whole, the determinants associated with this reduction are clearly different in the agricultural sector. Concerning the income of occupied persons, the reduction in inequality is less intense and more irregular in the agricultural sector. The various factors that determine the income of occupied persons also presented distinct behaviors for the agricultural and non-agricultural sectors.

Inward Foreign Direct Investment and Wage Inequality in Macedonia

:That foreign direct investment is an engine of growth in developing countries is a dominant view in the literature (De Mello 1997). However, the impact of FDI on inequality not only remains controversial, but has not received the same attention, particularly from scholars of transition economies (Vijaya and Kaltani 2007; Zulfiu-Alili 2014). Foreign-owned firms are increasingly important employers of labor in transition economies and pay higher wages than their domestic counterparts, all else being constant. Even though Macedonia has introduced extensive fiscal and business-sector reforms, it has lagged behind in attracting foreign investment, with thus far only a limited impact on employment. Using data from the People-Centred Analyses (PCA) survey for 2008, this article examines the question of whether foreign-owned firms pay higher wages than domestically owned firms in Macedonia, and whether this effect is associated with workers’ characteristics such as education, age, and gender distribution, ethnicity, region, type of contract, and occupation. This relationship is examined first by estimating an earnings equation and by decomposing overall wage inequality into inequality within groups and between groups, where the groups are defined by type of ownership, type of contract, level of education, occupation, age, gender, ethnicity, and region. The empirical results suggest that foreign-owned firms pay higher wages than their domestic counterparts, all else being equal. In addition, a decomposition analysis indicates that wage inequality is higher within foreign-owned firms than in domestically owned firms.

ARDL Investigation of Macroeconomic Mechanisms on ASEAN-5 Stock Earnings Equation

ARDL Investigation of Macroeconomic Mechanisms on ASEAN-5 Stock Earnings Equation

An Empirical Model of Tax Convexity and Self-Employment

Do progressive marginal income tax rates discourage self-employment? We assume risk neutrality to construct an implicit surtax on stochastic income relative to steady income, arising from a convex tax schedule. It is computed as part of a structural probit model with earnings equations and a tax simulator. The tax convexity variable and the net-of-tax income difference between self- and paid employment have the predicted signs and high levels of statistical significance for the probability of self-employment. A simulated flat tax reform suggests the tax effects are small.

The Correlates of Educated Women’s Labor Force Participation in Pakistan: A Micro-Study

This study attempts to determine the factors that affect educated women’s decision to participate in the labor force. Based on a field survey conducted in the district of Multan, we find that a number of factors have a positive and significant impact on women’s decision to work. These include women who fall in the age groups 35–44 and 45–54, the coefficients of all levels of education, the presence of an educated husband, marital status, family structure, and family expenditure. The presence of an educated father, being an educated married woman, location, distance from the district headquarters, the husband’s employment status and income, and ownership of assets significantly reduces women’s labor force participation. The results of the earnings equation show that variables such as women who live in an urban area and their level of education and experience are associated with a substantial increase in earnings with each additional year. The number of children has a negative and significant impact on women’s earnings. The hours-of-work model shows that age and the number of completed years of education have a positive effect on working hours, while the number of dependents and the number of hours spent on household activities have a negative effect on working hours.

Sexual-based Wage Discrimination when Educational Outcomes are Endogenous: The Spanish Case

A common feature of labour markets around the world is a substantial gender differential in wages, which themselves are affected by educational achievement. This paper studies both topics jointly for the Spanish labour market, analyzing how education contributes to shape wage distributions and looking into gender differences in pay for different educational levels. To achieve this, we first estimate earnings equations for men and women using the instrumental variable method proposed by Hausman and Taylor (1981), which allows us to treat education and other wage co-determinants as endogenous variables. Building on these results, we then follow the proposal by Jenkins (1994) and estimate a bivariate wage distribution for women, containing individual expected earnings with and without discrimination. This allows for a full distributional analysis of gender- wage gaps. Our results show that discrimination is distributed quite unevenly across female workers and that it grows for more educated and better paid wage earners.

Convergences in Men's and Women's Life Patterns: Lifetime Work, Lifetime Earnings, and Human Capital Investment

The changes in women and men's work lives have been considerable in recent decades. Yet much of the recent research on gender differences in employment and earnings has been of a more snapshot nature rather than taking a longer comparative look at evolving patterns. In this paper, we use 50 years (1964-2013) of US Census Annual Demographic Files (March Current Population Survey) to track the changing returns to human capital (measured as both educational attainment and potential work experience), estimating comparable earnings equations by gender at each point in time.We consider the effects of sample selection over time for both women and men and show the rising effect of selection for women in recent years. Returns to education diverge for women and men over this period in the selection-adjusted results but converge in the OLS results, while returns to potential experience converge in both sets of results. We also create annual calculations of synthetic lifetime labor force participation, hours, and earnings that indicate convergence by gender in worklife patterns, but less convergence in recent years in lifetime earnings. Thus, while some convergence has indeed occurred, the underlying mechanisms causing convergence differ for women and men, reflecting continued fundamental differences in women's and men's life experiences.