Browsing by Author "Hotz, V Joseph"

This study uses the data from the National Institute for Children Health and Development Study of Early Child Care and Youth Development to evaluate features of wage and childcare price changes that are associated with positive effects on children's early cognitive skills. Identifying beneficial characteristics of changes in market variables is especially relevant in a policy environment where the main priority of tax incentives related to the use of childcare is not facilitating the formation of children's cognitive skills, but reducing reliance on the welfare system through increase in employment among poor households.

We estimate jointly the discrete household choices related to the employment status of the mother and the use of a paid care mode, the demand functions for quantity and quality of childcare, the production function for cognitive outcomes, the wage process for the mother, and childcare price equations based on the hedonic pricing method, while at the same time introducing unobserved heterogeneity in the disturbance terms of the estimated outcomes. Our strategy for handling selection problems also utilizes the exogenous variation in childcare prices across the 10 geographical markets defined by the study sites in the NICHD SECCYD dataset, which in our model influence choices, but do not affect cognitive outcomes directly.

Our results show that failing to account for common unobserved characteristics would lead to underestimating the impact of all analyzed wage and price changes. We find that prices and wages do not have a statistically significant impact on the quality of paid care, while the marginal product of that attribute of care is positive for almost all input combinations in the production of cognitive attainment. Therefore, a policy utilizing changes in wages and prices can be effective in improving early cognitive skill only through the impact of those changes on the intensity of paid care use.

The comparison of the effects of wage and price changes on early cognitive skills for three sets of values of the observable household characteristics representing low, middle and high income households lead to the following conclusions: (1) a tax credit for working mothers and childcare subsidies for center-based care can bring disproportionate gains for children in low and middle income groups; (2) subsidizing paid home care for children less than three and a half years old can be more effective than subsidizing center-based care for the same age group in terms of improving cognitive outcomes at the age of five; (3) conditioning childcare assistance for paid care on the employment status of the mother does not seem to have a strong negative effect on early skill formation; and (4) tax incentives affecting wage rates and childcare prices prove to be beneficial for the formation of early cognitive skills only when they are implemented while the child is less than three and a half years old.

This dissertation explores the role of parents' financial resources in decisions made about college by parents and children entering adulthood and the consequences of those decisions for both parents and children. The second chapter examines the influence of parental wealth and income on children's college attendance and parental financing decisions, graduation, and the quality of college attended, as well as whether parental financing affects the subsequent indebtedness of parents and children. The results show that higher levels of parents' wealth and income increase the likelihood that children attend college with financial support relative to not attending college, and that parental wealth increases the likelihood that children graduate from college. There is descriptive evidence that parental support for college increases the subsequent level of housing debt that parents hold but does not reduce student debt for children.

Chapter 3 explores difference by race in the effects of parental wealth and income on college enrollment, financing, and graduation, against the backdrop of racial disparities between black and white families in wealth, income, and college outcomes. I find evidence of significant black-white differences in the effects of parental income and housing wealth. Higher levels of income raise the probability of college enrollment for children of white parents but not black. Conversely, increases to housing wealth raise the likelihood of enrollment only for black children. Increases to parental wealth and income increase the likelihood that white parents offer financial assistance to their children for college by similar amounts. There is no effect of wealth on the likelihood of financial transfers for black parents, but a large effect of income for black parents relative to white ones. I also find racial differences on graduation. I find a small but positive effect of increases in parental income on the likelihood of graduation from college for white children. For black children, I find no effect of income on graduation, but my results indicate that a one percent increase in parental income raises the likelihood of graduation by between 0.60 and 1.18 percent.

My dissertation examines human capital investments and their role in individual's labor market outcomes. Chapter 2 analyzes how public school teachers decide to make human capital investments and the effects that these decisions have on their future labor market outcomes. In particular, I look at the decisions of employed teachers to obtain an advanced degree. Teachers' education and career decisions are modeled via a dynamic framework in the presence of teacher-specific unobserved heterogeneity. I find that teachers' decisions to obtain master's degrees are motivated by more than just an increase in salary. In particular, I observe teachers with master's degrees receiving a better draw on job characteristics, as measured by school quality, and that teachers are willing to pay between $1,500 and $20,000 to to move up one quartile in school quality. I also find that teachers value having broad access to online degree programs more than they dislike tuition costs. Counterfactual simulations by unobserved ability are consistent with a story that high-type teachers value both the salary increase and a better draw in career prospects, whereas low-type teachers are mostly interested in the salary increase.

Chapter 3 investigates the evolution over the last two decades in the wage returns to schooling and early work experience. Using data from the 1979 and 1997 panels of the National Longitudinal Survey of Youth, we isolate changes in skill prices from changes in composition by estimating a dynamic model of schooling and work decisions. Importantly, this allows us to account for the endogenous nature of the changes in educational and accumulated work experience over this time period. We find an increase over this period in the returns to working in high school, but a decrease in the returns to working while in college. We also find an increase in the incidence of working in college, but that any detrimental impact of in-college work experience is offset by changes in other observable characteristics. Overall, our decomposition of the evolution in skill premia suggests that both price and composition effects play an important role. The role of unobserved ability is also important.

This dissertation considers how families affect economic decisions across two different settings. In Chapters 2 and 3, I use data from Indonesia to understand the role that flexibility plays in job choice for women and how it interacts with children. These chapters take different approaches to the same broad set of questions. In Chapter 2 I ask whether the cost of temporal flexibility varies between wage employment and self-employment, especially for mothers. I find all women are willing to give up a portion of their wage rate to work fewer hours and have more flexible hours. However, the cost to women of fewer hours and more flexible hours varies by whether a woman is self-employed or wage employed and whether she has children. All self-employed women and wage-working mothers are willing to give up more than 10% of their wages for a 10% increase in flexibility but the trade-off is steeper for mothers in wage employment than in self-employment. In Chapter 3, I use qualitative in-depth interviews to better understand the nuances that go into work decisions for both women and men and how these choices affect and are affected by their children. This study echoes the first in that women often discussed the importance of flexibility in their work arrangements, in particular to their choices in self-employment. These findings have implications for policies and programs designed to foster entrepreneurship in developing countries. Chapter 4 asks questions about how parents provide for children- albeit in a very different context. Using panel data from the United States, the paper examines the influence of parental wealth and income on children's college attendance and parental financing decisions, graduation, and quality of college attended, and whether parental financing affects the subsequent indebtedness of parents and children. Higher levels of parents' wealth and income increase the likelihood that children attend college with financial support relative to not attending college, and that parental wealth increases the likelihood that children graduate from college. We show descriptive evidence that parental support for college increases the subsequent level of housing debt that parents hold but does not reduce student debt for children.

Skills are central to many questions in labor economics ranging from the causes of rising wage inequality to understanding how individuals make decisions about their career. However, skills are typically measured incompletely in standard datasets, so an important empirical challenge in labor economics is to develop methods to measure or control for these unobserved variables. This dissertation builds a range of methodologies to deal with unobserved skills in models in labor economics and explores how the evolution of workers' skills has contributed to long-term trends in wage inequality.

Chapter 2 develops an approach to estimating workers’ skills from panel data and examines how changes in skills and occupational sorting patterns have contributed to rising wage inequality in the United States since the 1980s. The methodology uses repeated measurements of individuals’ labor market outcomes over time to reveal their underlying skills. Estimating a model of occupational choice using panel data from the Survey of Income and Program Participation (SIPP), I find that (1) as tasks in high-skill jobs have become increasingly complex, the distribution of workers' ability to perform those tasks has become more dispersed, (2) workers' ability to perform low-skill work tasks has become more homogeneous, and (3) workers have increasingly sorted into occupations by skill level, which has increased wage inequality.

Chapter 3 builds a related panel data methodology that can accommodate a more general class of models in which individuals can have imperfect information about their abilities. In particular, in addition to unobserved heterogeneity known to individuals, the methodology in this chapter also allows for initially unpredictable heterogeneity that may be revealed over time.

Chapter 4 develops a complementary approach to assessing the sensitivity of estimates of causal effects to omitted variable bias. In the canonical example of omitted variable bias, the presence of unobserved ability creates a bias in estimates of the causal effect of education on wages. This chapter provides an approach to quantifying the size of this bias by reasoning about the importance of unobserved ability compared to other included variables. In contrast to existing methods for sensitivity analysis in this setting, the approach also allows the research to explicitly reason about correlation between the omitted variable and observed controls.

The essays in this dissertation explore how barriers to advancement may lead to path dependence in economic outcomes. One uses a finite mixture model to demonstrate that some police officers are more likely than others to stop African-American drivers. The conclusion is one that though widely believed has proven challenging to establish empirically. By doing so, the analysis makes two contributions. First, it more closely aligns with the understanding of racial profiling. While disproportional susceptibility to vehicle searches exemplifies profiling, being pulled over is a much more common margin for police interaction, which this paper models a tractable way of identifying. Second, studies of secondary decisions such as searches frequently assume that there is no bias in the initial stop decision. An analysis of traffic stops across eight states questions this assumption, concluding that stopped drivers constitute a selected sample. Although bias is theoretically continuous, average behavior fits well into two distinct groups, with 30–40% of officers in the group that exhibits a relatively high propensity to stop minority drivers. The implication is that race-based policing is more prevalent than the "rotten apples" theory might suggest. The second essay asks how job loss is distributed in an unexpected downturn, examines the equity consequences, and evaluates policy responses. After demonstrating two novel empirical patterns relating job loss risk to earnings, it constructs and estimates a search model with heterogeneous job termination rates to explain the prevailing dynamics, and then uses it to evaluate the impact of large-scale transfers, unemployment insurance, and an earnings subsidy during a simulated downturn. Transfers have a minimal employment effect unless the shock also reduces savings. Raising unemployment benefits by 30% leads to a 0.6 point increase in the unemployment rate. Adding an earnings subsidy to unemployment benefits raises employment by 7 percentage points at a 23% lower level of inequality yet increases costs by only 16-30%. The tradeoff is lower employment at better paying jobs versus higher consumption at subsidized low-wage jobs. In contrast to a compensating differentials framework, the model shows that lower earners tend to be more at risk for layoffs, and that this effect is stronger following a negative aggregate shock. Following a simulated shock, mean consumption falls by 5% yet consumption at the 10th percentile drops by 16%.

My dissertation has three chapters which develop and apply microeconometric tech- niques to empirically relevant problems. All the chapters examines the robustness issues (e.g., measurement error and model misspecification) in the econometric anal- ysis. The first chapter studies the identifying power of an instrumental variable in the nonparametric heterogeneous treatment effect framework when a binary treat- ment variable is mismeasured and endogenous. I characterize the sharp identified set for the local average treatment effect under the following two assumptions: (1) the exclusion restriction of an instrument and (2) deterministic monotonicity of the true treatment variable in the instrument. The identification strategy allows for general measurement error. Notably, (i) the measurement error is nonclassical, (ii) it can be endogenous, and (iii) no assumptions are imposed on the marginal distribution of the measurement error, so that I do not need to assume the accuracy of the measure- ment. Based on the partial identification result, I provide a consistent confidence interval for the local average treatment effect with uniformly valid size control. I also show that the identification strategy can incorporate repeated measurements to narrow the identified set, even if the repeated measurements themselves are endoge- nous. Using the the National Longitudinal Study of the High School Class of 1972, I demonstrate that my new methodology can produce nontrivial bounds for the return to college attendance when attendance is mismeasured and endogenous.

The second chapter, which is a part of a coauthored project with Federico Bugni, considers the problem of inference in dynamic discrete choice problems when the structural model is locally misspecified. We consider two popular classes of estimators for dynamic discrete choice models: K-step maximum likelihood estimators (K-ML) and K-step minimum distance estimators (K-MD), where K denotes the number of policy iterations employed in the estimation problem. These estimator classes include popular estimators such as Rust (1987)’s nested fixed point estimator, Hotz and Miller (1993)’s conditional choice probability estimator, Aguirregabiria and Mira (2002)’s nested algorithm estimator, and Pesendorfer and Schmidt-Dengler (2008)’s least squares estimator. We derive and compare the asymptotic distributions of K- ML and K-MD estimators when the model is arbitrarily locally misspecified and we obtain three main results. In the absence of misspecification, Aguirregabiria and Mira (2002) show that all K-ML estimators are asymptotically equivalent regardless of the choice of K. Our first result shows that this finding extends to a locally misspecified model, regardless of the degree of local misspecification. As a second result, we show that an analogous result holds for all K-MD estimators, i.e., all K- MD estimator are asymptotically equivalent regardless of the choice of K. Our third and final result is to compare K-MD and K-ML estimators in terms of asymptotic mean squared error. Under local misspecification, the optimally weighted K-MD estimator depends on the unknown asymptotic bias and is no longer feasible. In turn, feasible K-MD estimators could have an asymptotic mean squared error that is higher or lower than that of the K-ML estimators. To demonstrate the relevance of our asymptotic analysis, we illustrate our findings using in a simulation exercise based on a misspecified version of Rust (1987) bus engine problem.

The last chapter investigates the causal effect of the Omnibus Budget Reconcil- iation Act of 1993, which caused the biggest change to the EITC in its history, on unemployment and labor force participation among single mothers. Unemployment and labor force participation are difficult to define for a few reasons, for example, be- cause of marginally attached workers. Instead of searching for the unique definition for each of these two concepts, this chapter bounds unemployment and labor force participation by observable variables and, as a result, considers various competing definitions of these two concepts simultaneously. This bounding strategy leads to partial identification of the treatment effect. The inference results depend on the construction of the bounds, but they imply positive effect on labor force participa- tion and negligible effect on unemployment. The results imply that the difference- in-difference result based on the BLS definition of unemployment can be misleading

due to misclassification of unemployment.

This dissertation examines the extent of different forms of informal insurance provided by both co-resident and non-co-resident family members. Primarily relying on the Panel Study of Income Dynamics, a unique, longitudinal survey dataset from the United States, this dissertation provides new insight on the importance and unique motives that may drive interactions between family members. These two essays investigate the different forms of assistance that the family uses in two different contexts: in response to unemployment and health conditions. The results in this paper provide new insight into the role that informal interactions can have on decisions and behavior. This research suggests new direction for future economic models dealing with the family, networks, risk, unemployment, health, and location decisions. The overarching theme is that decisions are made jointly across households, not just within a household.

In this dissertation, I present two essays linked by their focus on forces that act on young people as they prepare to enter adulthood and their economically independent life. In the first, I investigate the impact of parents' location and occupational attributes on young adult children's labor market outcomes, particularly wages. I exploit the genealogical structure of the Panel Study of Income Dynamics (PSID) to measure locations, occupations and wages of young adults and their parents. I find that college graduates who live near their parents have lower wages than those who do not, but that wages for high school graduates are not strongly correlated with proximity to parents. In order to determine the reasons for these patterns, I build and estimate a model of young adults' location and occupation decisions to account for potentially competing effects parents may have on their children's wages. Using the model, I find evidence that young adults have strong preferences for living near parents, a result which through compensating differentials can partially account for the tendency to earn lower wages when near parents. However, I estimate that young people across all levels of educational attainment place similar value on this proximity. I also find that living near parents may directly enhance productivity and/or occupation quality and lead to higher wages. In particular, I find that high school graduates whose fathers are in cognitive skill-intense occupations have higher wages within and occupation and switch into more cognitive skill-intense occupations themselves if they live in the same labor market as their father, but that this effect is not present for college graduates. I also find a differential selection in the earnings potential of movers and differential impacts of the cost of occupational switching between high school and college graduates. These differences all substantially contribute to the differences in wage and location choice patterns between high school and college graduates.

In the second, I present joint work with V. Joseph Hotz, Peter Arcidiacono and Esteban Aucejo on college admissions in the University of California system. College graduation is an important outcome for future welfare, and in this chapter we examine possible causes for an increase in college graduations among UC students who enrolled in 1998-2000 versus those who had enrolled in the previous three years. In between these cohorts, Proposition 209 banned using racial preferences in admissions at California's public colleges. We analyze unique data for all applicants and enrollees within the University of California (UC) system before and after Prop 209. After Prop 209, graduation rates of minorities increased by 4.4\%. We characterize conditions required for better matching of students to campuses to account for this increase. We find that Prop 209 did improve matching and this improvement was important for the graduation gains experienced by less-prepared students. At the same time, better matching only explains about 20\% of the overall graduation rate increase. Changes after Prop 209 in the selectivity of enrolled students explains 34-50\% of the increase. Finally, it appears UC campuses responded to Prop 209 by doing more to help retain and graduate its students, which explains between 30-46\% of the post-Prop 209 improvement in the graduation rate of minorities.

While labor studies of the effects of income taxation have often focused on labor force participation and work hour decisions, Feldstein (1995) argued that taxpayers ultimately want to adjust their taxable income in response to changes in marginal tax rates. He also pointed out that adjusting taxable income is not limited to changing hours of work. For instance, facing higher tax rates, individuals may reduce their taxable income by giving up high-paid occupations that require high levels of effort in exchange for jobs that pay lower wages but are less onerous. In this dissertation, I examine how individuals change their occupations to adjust their wages, levels of work effort, and number of work hours in response to changes in marginal tax rates. In particular, I estimate effects of the switch from separate to joint taxation at the federal level in 1948 on married couples’ occupations. This policy increased marginal tax rates for wives but decreased them for husbands. My results show that joint taxation had no effect on husbands, reduced labor force participation rates among wives, and induced wives who remained in the labor force to choose occupations that paid lower wages, required lower effort, but involved the same level of full-time work. These results reveal that under some circumstances, individuals may respond to higher tax rates by reducing work effort instead of reducing work hours. The largest effects of joint taxation were on middle-age wives, who faced the largest husband-wife earning gap among all wives.