Evaluation of the Australian Wage Subsidy Special Youth ...

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the unobserved component. If the variables included in the propensity score model and
participation equation of the bivariate probit were used by the caseworkers in SYETP to
determine that an applicant is ‘job-ready-with-assistance’, then selection on
unobservables should be negligible.
For the exclusion restriction to identify the bivariate probit model, some variables
included in the participation equation estimated are then excluded from the employment
equation. An important aspect of this estimation approach is the identification of a
credible instrument for the exclusion restriction, in this case age and referrals to CEP.
There is some support for this role for these variables in the unweighted data, as later
sensitivity analysis in Chapter 7 reports. Also, the results of estimation rest upon the
suitability of the underlying assumption of the bivariate normal distribution for the errors
in the participation and employment equations. Finally, the specification of the model is
assumed correct, with no variables left out to cause mis-specification bias.
For the semi-parametric method of PSM, CIA is the critical underlying assumption.
However, again the specification of the model for the propensity to participate in SYETP
is assumed correct. The variables in the model are central to the credibility of the CIA
assumption. Whether the CIA is met cannot be accurately tested, however the plausibility
of CIA can be assessed.
In regard to labour market evaluation, pre-programme labour market history is considered
the most important explanatory variable, and this is part of the model applied here (see
Ham and Lalonde (1996)). There are a large number of variables generally and it is
considered that at least with regard to the breadth of individual characteristics controlled
for, the CIA has been satisfied. However, although a wide range of individual
characteristics has been included, it could be argued that some are lacking that could
affect both participation and employment. Gerfin and Lechner (2000) had the long-term
unemployment at the regional placement office, which here would correspond to the CES.
This sort of variable is not available in the data however. A variable in the data and which