Classification Error in Dynamic Discrete Choice Models: Implications for Female Labor Supply Behavior

Michael P. Keane, Robert M. Sauer

Research output: Contribution to journalArticlepeer-review


Two key issues in the literature on female labor supply are (i) whether persistence in employment status is due to unobserved heterogeneity or state dependence, and (ii) whether fertility is exogenous to labor supply. Until recently, the consensus was that unobserved heterogeneity is very important and fertility is endogenous. Hyslop (1999) challenged this. Using a dynamic panel probit model of female labor supply including heterogeneity and state dependence, he found that adding autoregressive errors led to a substantial diminution in the importance of heterogeneity. This, in turn, meant he could not reject that fertility is exogenous. Here, we extend Hyslop (1999) to allow classification error in employment status, using an estimation procedure developed by Keane and Wolpin (2001) and Keane and Sauer (2005). We find that a fairly small amount of classification error is enough to overturn Hyslop's conclusions, leading to overwhelming rejection of the hypothesis of exogenous fertility. Copyright 2009 The Econometric Society.
Original languageEnglish
Pages (from-to)975-991
Number of pages17
Issue number3
Early online date21 May 2009
Publication statusPublished - May 2009


  • Female Labor Supply
  • Fertility
  • Discrete Choice
  • Classification Error
  • Simulated Maximum Likelihood

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