Neighborhood effects on unemployment?: A test à la Altonji

This paper aims to test for the influence of neighborhood deprivation on individual unemployment probability, in Lyon (France). We estimate a bivariate probit model of unemployment and location in a deprived neighborhood. Our identification strategy is twofold. First, we instrument neighborhood type by spouse's workplace and gender of the children in the household. Second, we use the methodology proposed by Altonji et al. (2005), which in our case consists of hypothesizing about the correlation between the unobservables that determine unemployment and the unobservables that influence selection into neighborhood types. Our results show that the effect of neighborhood deprivation is not significantly different from zero in the bivariate probit with exclusion restrictions. We show also that correlation among the unobservables as low as 6% of the correlation of observables is sufficient to explain the positive neighborhood effect observed when endogeneity is not taken into account.