State Dependence, Serial Correlation and Heterogeneity in Intertemporal Labor Force Participation of Married Women

A dynamic search framework is developed to analyze the intertemporal labor force participation behavior of married women, using longitudinal data to allow for a rich dynamic structure. The sensitivity to alternative distributional assumptions is evaluated using linear probability and probit models. The dynamic probit models are estimated using maximum simulated likelihood (MSL) estimation, to overcome the computational difficulties inherent in maximum likelihood estimation of models with nontrivial error structures. The results find that participation decisions are characterized by significant state dependence, unobserved heterogeneity, and negative serial correlation in the error component. The hypothesis that fertility decisions are exogenous to women's participation decisions is rejected when dynamics are ignored; however, there is no evidence against this hypothesis in dynamic model specifications. Women's participation response is stronger to permanent than current nonlabor income, reflecting unobserved taste factors.