Modeling Employment Dynamics with State Dependence and Unobserved Heterogeneity

41 Pages Posted: 26 Apr 2010

See all articles by Victoria L. Prowse

Victoria L. Prowse

Purdue University - Department of Economics; IZA Institute of Labor Economics; German Institute for Economic Research (DIW Berlin)

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This paper extends existing work on labor force participation dynamics by distinguishing between full-time and part-time employment and allowing unobserved heterogeneity in the effects of previous employment outcomes, children and education on employment dynamics. The results reveal significant autocorrelation in unobservables, and significant variation in the effects of children and education on labor supply preferences. Moreover, omission of random coeffcients or autocorrelation can bias significantly estimates of policy effects. On average, policies temporarily incentivizing part-time and full-time employment are equally effective tools for reducing non-employment. However, non-employment among women with young children is more responsive to policies encouraging part-time rather than full-time work.

Keywords: discrete labor supply, unobserved heterogeneity, state dependence, repeated multinomial choice

JEL Classification: C15, C25, J6, J22

Suggested Citation

Prowse, Victoria L., Modeling Employment Dynamics with State Dependence and Unobserved Heterogeneity. IZA Discussion Paper No. 4889, Available at SSRN: or

Victoria L. Prowse (Contact Author)

Purdue University - Department of Economics ( email )

West Lafayette, IN 47907-1310
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstra├če 58
Berlin, 10117

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