Testing for the specification of the wage equation: double selection approach or single selection approach

Abstract

The wage that a worker receives is observed only when he/she is employed. The employment of the worker, however, depends on two sequential decisions: the worker's decision to work and the employer's decision to hire. The wage sample, thus, is obtained through a double selection process. Estimation of the wage equation ignoring the roles of both selection decisions may result in omitted variable misspecification, leading to biased estimates. This study rejects the wage specification that allows only one selection decision, and shows that the wage equation with double selection specification cannot be rejected at any conventional level of significance.