The Accuracy of Predicted Wages of the Non-Employed and Implications for Policy Simulations from Structural Labour Supply Models

We examine the accuracy of predicted wages for the non-employed. We argue that unemployment, marginal attachment, and not in the labour force are three distinct states. Using panel data from Australia, we test the accuracy of predicted wages for these three groups of non-employed using sample selection models. Focusing on those individuals who subsequently enter employment, we find that predictions which incorporate the estimated sample selection correction perform poorly, particularly for the marginally attached and the not in the labour force. These results have important implications for policy simulations from structural labour supply models. Copyright © 2010 Australian Treasury. Journal compilation © 2010 The Economic Society of Australia.