IWS Documented News Service _______________________________ Institute for Workplace Studies-----------------Professor Samuel B. Bacharach School of Industrial & Labor Relations--------Director, Institute for Workplace Studies Cornell University 16 East 34th Street, 4th floor----------------------Stuart Basefsky New York, NY 10016-------------------------------Director, IWS News Bureau ________________________________________________________________________

THE CONGRESS OF THE UNITED STATES Congressional Budget Office (CBO) Background Paper

Projecting Labor Force Participation and Earnings in CBO's Long-Term Microsimulation Model October 2006 http://www.cbo.gov/ftpdocs/76xx/doc7676/10-27-LaborForce.pdf [full-text, 120 pages]

[excerpt] The Congressional Budget Office (CBO) uses a microsimulation approach to analyze the budgetary and distributional impact of Social Security and other age-related policy issues. This background paper provides a detailed description of one important component in the microsimulation model: the equations used to project labor force participation, hours worked, unemployment, and earnings outcomes. The paper describes the estimated relationships in CBO's microsimulation model, the data sets used, the principles underlying causal effects, and the properties of the projections over time. In keeping with CBO's mandate to provide objective, nonpartisan analysis, the paper makes no policy recommendations.

Contents Introduction 1 Development of the Model 1 Evaluating Projected Labor Market Outcomes 5 Projecting Labor Market Participation and Hours Worked 6 Labor Force Participation 6 Full-Time Versus Part-Time Employment 11 Hours for Part-Time Workers 17 Unemployment Spells 17 Projecting Individual Earnings Outcomes 20 Predictable Earnings Differences Across Groups and Time 22 Idiosyncratic Earnings Differentials 28 Appendix A: March Current Population Survey Data Used in the Analysis 75 Appendix B: CBOLT Representative Sample Data 79 Appendix C: Labor Force Equations Used to Model Persistence 83 Appendix D: Permanent and Transitory Earnings Shocks 109

Tables 1. Labor Force Participation Logit Coefficients for Men 33 2. Labor Force Participation Logit Coefficients for Women 37 3. Full-Time Employment Logit Coefficients for Men 41 4. Full-Time Employment Logit Coefficients for Women 45 5. Full-Time or Part-Time Employment Persistence for Men, by Age Group 49 6. Full-Time or Part-Time Employment Persistence for Women, by Age Group 50 7. Part-Time Hours Ordered Logit Coefficients for Men 51 8. Part-Time Hours Ordered Logit Coefficients for Women 55 9. Unemployment Logit Coefficients for Men 59 10. Unemployment Logit Coefficients for Women 63 11. Earnings Coefficients for Men 67 12. Earnings Coefficients for Women 69 13. Annual Earnings Distribution for 50- to 60-Year-Old Men, by Lifetime Earnings Decile 71 14. Annual Earnings Distribution for 50- to 60-Year-Old Women, by Lifetime Earnings Decile 73 C-1. Historical Full-Time Employment Logit Coefficients for Men 84 C-2. Historical Full-Time Employment Logit Coefficients for Women 88 C-3. Historical Part-Time Hours Ordered Logit Coefficients for Men 92 C-4. Historical Part-Time Hours Ordered Logit Coefficients for Women 96 C-5. Historical Unemployment Logit Coefficients for Men 100 C-6. Historical Unemployment Logit Coefficients for Women 104

Figures 1. Steps to Project Earnings in CBO's Microsimulation Model 2 2. Actual and Projected Labor Force Participation for Men, by Birth Cohort 7 3. Actual and Projected Labor Force Participation for Women, by Birth Cohort 8 4. Projected Longitudinal Labor Force Participation for 62-Year-Old Men 12 5. Projected Longitudinal Labor Force Participation for 62-Year-Old Women 13 6. Actual and Projected Full-Time Employment for Men, by Birth Cohort 14 7. Actual and Projected Full-Time Employment for Women, by Birth Cohort 15 8. Number of Part-Time Hours That Men Worked 18 9. Number of Part-Time Hours That Women Worked 19 10. Mean Unemployment Spell for Men, by Age 20 11. Mean Unemployment Spell for Women, by Age 21 12. Predicted Log Full-Time-Equivalent Earnings for Men, by Education Level, Age, and Birth Cohort 25 13. Predicted Log Full-Time-Equivalent Earnings for Women, by Education Level, Age, and Birth Cohort 26 14. Lower Half of the Projected Annual Earnings Distribution 31 15. Upper Half of the Projected Annual Earnings Distribution 32