Labor market participation, social benefits and wages in Romania

A large share of the Romanian population relies on social benefits and labor market participation is decreasing. The present paper aims, firstly, at investigating the determinants of labor market participation in Romania with a special emphasize on the relationship between social benefits and labor market participation. We find out that more dependent an individual is to social benefits, less likely is for him to participate on the labor market. Secondly, using the results of this estimation we shall construct a wage equation by controlling for selection bias in participation using the Heckman two#step procedure. The independent variables used in the wage equation account for human capital endowment (education, work experience), socio#demographic characteristics (gender, marital status) and geographical characteristics (region). The wage equation shall be further used in order to build a counterfactual for the wage of non# participants to the labor market if they had participated. We find out that observed characteristics such as socio#demographic and geographic characteristics as well as the endowment with human capital have statistically significant effects on wage levels, and unobserved characteristics which make labor market participation less likely tend to be associated with lower wages. We shall discuss whether the income gain measured as the difference between the simulated wage (in work income) and the unemployment benefit received (out of work income) could be an incentive for labor market participation and work does pay. We build our analysis on 2007 EU# SILC micro data for Romania.

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