Low-pay transitions and attrition bias in Italy : An analysis using simulation based estimation

This paper analyses the extent to which existing econometric models of low-pay transition probabilities in Italy are biased by the presence of endogenous panel attrition. Non-random exits from the sample of wage earners may result from both demand and supply side factors and this could lead to under- or overestimation (respectively) of the extent of low-wage persistence. The analysis is carried out by extending the bivariate probit model used in Cappellari [1999] (where starting state and transition probabilities are jointly modeled thus tackling the endogeneity of the conditioning starting wage state) with a third equation which controls for the non-randomness of panel attrition. The resulting trivariate probit model with endogenous switching, whose evaluation is not feasible within the routines customarily available in microeconometric packages, is implemented by applying simulation estimation techniques. Results show the ignorability of attrition in SHIW data, thus pointing towards the robustness of the results previously obtained without controlling for attrition.