Stochastic properties and functional forms in life cycle : models for transitions into and out of employment

The paper discusses a justification for a particular econometric framework for analysing transitions into and out of employment in an intertemporal context with uncertainty. The analysis extends the models found in the literature by introducing a discrete choice variable that is unobservable to the econometrician. Econometric models for labor supply in an intertemporal setting have been considered by a number of authors. See for instance MaCurdy (1982), (1983), Killingsworth (1984) and the references therein. Most of these studies, however, do not discuss the properties of the latent variables that enter the model. That is, the choice of probability distributions for the unobservables is made ad hoc and, apart from statistical diagnostic checks rarely any theoretical arguments to support these choices are provided