SELF-SELECTION AND WAGES DURING VOLATILE TRANSITION

Using data for 1995, 1997 and 2001 and a sophisticated selectivity correction econometric methodology, this paper explores human capital allocation and returns in four labor market sectors in Bulgaria. Our results indicate that while in the aftermath of structural reform highly productive laborers undertook self-employment, the private sector failed to develop along the high skill and high return fringes of the economy. Our results raise questions about the success of structural reform, and stress the need to adequately account for the impact of self-selection based on both observed and unobserved skills in the assessment of returns to human capital.