State Dependence in a Multi-State Model of Employment Dynamics

44 Pages Posted: 7 Jun 2005

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)

Date Written: June 2005


A multinomial choice framework is used to investigate the nature of women's transitions between full-time employment, part-time employment and non-employment. The stochastic framework allows time varying and time invariant unobserved preferences, and also controls for the possible endogeneity of education, fertility and non-labor income. Significant positive true state dependence is found in both full-time and part-time employment. This finding is robust to the specification of unobserved preferences. The results are used to assess the dynamic effects of three temporary wage subsidies. All three policies have substantial effects on employment behavior for up to 6 years. However, obtaining a permanent increase in employment requires sustained or repeated interventions.

Keywords: Dynamic labor supply, heterogeneity, multinomial choice, state dependence

JEL Classification: C15, C35, J62

Suggested Citation

Prowse, Victoria L., State Dependence in a Multi-State Model of Employment Dynamics (June 2005). 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 )

Mohrenstraße 58
Berlin, 10117

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