Evaluation of the Australian Wage Subsidy Special Youth ...
Evaluation of the Australian Wage Subsidy Special Youth ... Evaluation of the Australian Wage Subsidy Special Youth ...
22 1.3.4 Observables and unobservables Friedlander et al. (1997) express succinctly the difference between selection on observables and selection on unobservables. The behaviour of the participants is expressed in the econometric model: (21) Y it = c t X i + b t D io + u it t>0 employment (22) D io = a 0 Z i + e io participation Again, Y it is the outcome, such as employment, for the ith person in period t , where t=0 is the period where the treatment occurs. The X i and Zi are sets of exogenous characteristics for the ith individual, that can be overlapping and are measured pre – program. The importance of measuring pre-program is to avoid endogeneity, where the characteristics may change after program entry due to the program, these would confound measurement of the program effect. D io is the program participation binary variable, D io =1 if participant and D io =0 if not (the comparison group); u it, e io are error terms. The mean effect of the program in period t after participation is the coefficient b t . If there is no correlation between the participation and the error in the employment equation E(D io , u it ) =0, then an unbiased estimate of the coefficient b t is obtained simply from the employment equation (21). Correlations between the participation and the employment error E(D io , u it ) ≠ 0, can arise from selection due to observables or unobservables (Friedlander et al. (1997), Heckman and Robb (1985), Heckman and Hotz (1989)). The correlation between the participation and the employment error E(D io , u it ) ≠0 can arise through either Z i or e io, in the equation (22) representing participation . If the error terms for employment and participation are uncorrelated E(u it, e io ) = 0 , but there is correlation between the error of the employment equation and the characteristics affecting participation E( Z i ,u it ) ≠ 0 then selection is on observables. Conversely, when there is selection on unobservables, the error terms for employment and participation are correlated E(u it, e io ) ≠ 0 but there is no
23 correlation for the error of the employment equation and the characteristics affecting participation E( Z i ,u it ) = 0. The Heckman selection model assumes selection on unobservables and attempts to control for that, while propensity score matching assumes selection on observables. In the later chapters, these modelling methods and their assumptions are presented and applied. 1.4 Brief comment on recent overseas evidence of wage subsidy evaluations This section reviews some existing information for wage subsidy programs in other countries. This appraisal is limited to recent evidence since the 1990’s, as older material is well reviewed elsewhere. Only micro-economic evaluation evidence is addressed. The main aim is to consolidate a general perspective of the wage subsidy evidence found overseas. The exposition is then not comprehensive with regard to the details of the programs or a critical review of the evaluation evidence. Instead, key themes are identified. A number of published reviews provide recent overviews of wage subsidies and other programs. To avoid repetition, their conclusions are summarized here. Katz (1996) pp31-33 and Table 4 found that some targeted wage subsidies gave positive gains. It was found that the US Targeted Jobs Tax Credit and YIEPP private sector wage subsidy, might have modestly raised disadvantaged youth employment rates. However it was concluded that there was little satisfactory formal evidence of the impacts of wage subsidies, and that many studies were not compelling in their evidence due to flawed evaluation methods or poor data. Friedlander, Greenberg and Robins (1997) concentrate on US programs targeted on the disadvantaged, including wage subsidies. However the focus of the literature review was to get an overview of whether, as a whole, any social programs had gains for any groups of men, women and youths. The main recent wage subsidy program in the US has been the JTPA-II-A subsidised on-the-job training, for which a random assignment experiment
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22<br />
1.3.4 Observables and unobservables<br />
Friedlander et al. (1997) express succinctly <strong>the</strong> difference between selection on<br />
observables and selection on unobservables. The behaviour <strong>of</strong> <strong>the</strong> participants is<br />
expressed in <strong>the</strong> econometric model:<br />
(21) Y it = c t X i + b t D io + u it t>0 employment<br />
(22) D io = a 0 Z i + e io participation<br />
Again, Y it is <strong>the</strong> outcome, such as employment, for <strong>the</strong> ith person in period t , where t=0<br />
is <strong>the</strong> period where <strong>the</strong> treatment occurs. The X i and Zi are sets <strong>of</strong> exogenous<br />
characteristics for <strong>the</strong> ith individual, that can be overlapping and are measured pre –<br />
program. The importance <strong>of</strong> measuring pre-program is to avoid endogeneity, where <strong>the</strong><br />
characteristics may change after program entry due to <strong>the</strong> program, <strong>the</strong>se would confound<br />
measurement <strong>of</strong> <strong>the</strong> program effect. D io is <strong>the</strong> program participation binary variable, D io<br />
=1 if participant and D io =0 if not (<strong>the</strong> comparison group); u it, e io are error terms. The<br />
mean effect <strong>of</strong> <strong>the</strong> program in period t after participation is <strong>the</strong> coefficient b t . If <strong>the</strong>re is<br />
no correlation between <strong>the</strong> participation and <strong>the</strong> error in <strong>the</strong> employment equation<br />
E(D io , u it ) =0, <strong>the</strong>n an unbiased estimate <strong>of</strong> <strong>the</strong> coefficient b t is obtained simply from <strong>the</strong><br />
employment equation (21).<br />
Correlations between <strong>the</strong> participation and <strong>the</strong> employment error E(D io , u it ) ≠ 0, can<br />
arise from selection due to observables or unobservables (Friedlander et al. (1997),<br />
Heckman and Robb (1985), Heckman and Hotz (1989)). The correlation between <strong>the</strong><br />
participation and <strong>the</strong> employment error E(D io , u it ) ≠0 can arise through ei<strong>the</strong>r Z i or e io, in<br />
<strong>the</strong> equation (22) representing participation . If <strong>the</strong> error terms for employment and<br />
participation are uncorrelated E(u it, e io ) = 0 , but <strong>the</strong>re is correlation between <strong>the</strong> error <strong>of</strong><br />
<strong>the</strong> employment equation and <strong>the</strong> characteristics affecting participation E( Z i ,u it ) ≠ 0 <strong>the</strong>n<br />
selection is on observables. Conversely, when <strong>the</strong>re is selection on unobservables, <strong>the</strong><br />
error terms for employment and participation are correlated E(u it, e io ) ≠ 0 but <strong>the</strong>re is no
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