# Lifecycle-consistent female labor supply with nonlinear taxes: evidence from unobserved effects panel data models with censoring, selection and endogeneity

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## Abstract

This paper uses the Panel Study of Income Dynamics (PSID) from 1979 to 2007 to estimate within-period lifecycle-consistent labor supply elasticities of US females in a two-stage budgeting framework. The paper combines a variety of econometric approaches to estimate unobserved effects panel data models with censoring, selection and endogeneity. The paper finds evidence of substantial upward bias in estimated wage elasticities from pooled panel models which do not account for unobserved effects, as fixed effects and correlated random effects (CRE) specifications yield smaller elasticities. Estimates are also somewhat sensitive to using a lifecycle-consistent specification versus a standard static model. The lifecycle-consistent wage elasticity from a CRE model with instrumental variables is 0.56 on the extensive margin and 0.31 on the intensive margin for an overall wage elasticity of 0.87. The standard static model, on the other hand, yields a wage elasticity of 0.46 on the extensive margin and 0.13 on the intensive margin for an overall elasticity of 0.59.

## Keywords

Taxes and female labor supply Lifecycle labor supply Fixed effects models with censoring Selection Endogeneity## JEL Classification

J22 H24 C14 C23 C24## Notes

### Acknowledgments

I am grateful to Gary Engelhardt for his constant encouragement and generous support during this research. I thank Sonia Oreffice, Soren Blomquist, Monica Singhal, Tom Kniesner, Dan Black, Duke Kao, Jeffrey Kubik, Jan Ondrich, Michael Weiss, two anonymous referees and seminar participants at Syracuse University, Miami University, Federal Reserve Bank of Dallas, RAND Corporation, Institute of Social Research at the University of Michigan, conference participants at the 17th Annual Meetings of the Society of Labor Economists (SOLE) in Chicago, 99th Annual Conference on Taxation in Boston, and the 13th International Panel Data Conference in Cambridge, England for helpful discussions and insightful comments on previous versions.

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