Omitted Variables in the Measurement of a Labor Quality Index: The Case of Spain

27 Pages Posted: 14 Mar 2011

See all articles by Aitor Lacuesta

Aitor Lacuesta

Banco de España

Sergio Puente

Banco de España

Pilar Cuadrado

Banco de España

Date Written: February 22, 2011

Abstract

Traditional measures of labor quality might have the shortcoming of missing some features of the very important increase in labor utilization within European countries. In particular, we explore the case of Spain. Despite showing one of the most important increases in labor quality in the EU according to standard methods, it also presents a negative TFP growth. The paper shows the importance of consideringon top of observed changes in the composition of the labor force by gender, age, education, tenure, and nationalitychanges in both average and relative productivities of those abovementioned socio-demographic groups over time. We first use a time varying weight index in order to capture the decrease in relative productivities across characteristics. Once this issue is considered the estimated growth of labor quality decreases notably and the index becomes flat between 2002 and 2006. We relate this slowdown to the increasing over-education of the Spanish workforce in the recent past. We then incorporate a selection model into the labor force. We argue that in the recent past there has been a massive entry of workers with below average unobserved abilities, generating a decrease in quality of labor. Indeed labor quality slightly decreased from 1995 onwards (always increasing without the selection model).

Suggested Citation

Lacuesta, Aitor and Puente, Sergio and Cuadrado, Pilar, Omitted Variables in the Measurement of a Labor Quality Index: The Case of Spain (February 22, 2011). Review of Income and Wealth, Vol. 57, No. 1, pp. 84-110, 2011. Available at SSRN: https://ssrn.com/abstract=1782514 or http://dx.doi.org/10.1111/j.1475-4991.2010.00421.x

Aitor Lacuesta

Banco de España ( email )

Madrid 28014
Spain

Sergio Puente

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Pilar Cuadrado

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

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