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


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    Robert Breunig thanks the Australian Treasury for hospitality and support. We benefitted from comments by Deborah Cobb-Clark, Jennifer Foster, Paul Frijters, Xiaodong Gong, Guyonne Kalb, Anthony King, Paul Miller and Marty Robinson. We are grateful to them. This paper uses confidentialised unit record data from the Household, Income and Labour Dynamics in Australia (HILDA) survey. The HILDA Project was initiated and is funded by the Commonwealth Department of Families, Community Services and Indigenous Affairs (FaCSIA) and is managed by the Melbourne Institute of Applied Economic and Social Research (MIAESR). The findings and views reported in this paper, however, are those of the authors and there is a non-countable set of people and organisations to whom the findings and views should not be attributed including FaCSIA, MIAESR and the Australian Treasury.

Robert Breunig, Economics Program, Research School of Social Sciences, Building 9, Australian National University, Canberra, ACT 0200, Australia. Email:


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.