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Identification of the covariance structure of earnings using the GMM estimator

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  • Aedín Doris
  • Donal O’Neill

    ()

  • Olive Sweetman

Abstract

In recent years there has been a rapid growth in the number of studies that have used the GMM estimator to decompose the earnings covariance structure into its permanent and transitory parts. Using a heterogeneous growth model of earnings, we consider the performance of the estimator in this context. We use Monte Carlo simulations to examine the sensitivity of parameter identification to key features such as panel length, sample size, the degree of persistence of earnings shocks and the specification of the earnings model. We show that long panels allow the identification of the model, even when persistence in transitory shocks is high. Short panels, on the other hand, are insufficient to identify individual parameters of the model even with moderate levels of persistence. Copyright Springer Science+Business Media, LLC. 2013

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File URL: http://hdl.handle.net/10.1007/s10888-012-9216-5
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Bibliographic Info

Article provided by Springer in its journal The Journal of Economic Inequality.

Volume (Year): 11 (2013)
Issue (Month): 3 (September)
Pages: 343-372

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Handle: RePEc:kap:jecinq:v:11:y:2013:i:3:p:343-372

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Web page: http://springerlink.metapress.com/link.asp?id=111137

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Keywords: Identification; GMM; Covariance structure of earnings; J31; D31;

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Citations

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Cited by:
  1. Kässi, Otto, 2011. "Earnings Dynamics of Men and Women in Finland: Permanent Inequality versus Earnings Instability," MPRA Paper 34301, University Library of Munich, Germany.
  2. SOLOGON Denisa & VAN KERM Philippe, 2014. "Earnings dynamics, foreign workers and the stability of inequality trends in Luxembourg 1988-2009," CEPS/INSTEAD Working Paper Series 2014-03, CEPS/INSTEAD.
  3. Cappellari, Lorenzo & Jenkins, Stephen P., 2013. "Earnings and Labour Market Volatility in Britain," IZA Discussion Papers 7491, Institute for the Study of Labor (IZA).
  4. repec:ese:iserwp:2013-23 is not listed on IDEAS
  5. Markus Jäntti & Stephen P. Jenkins, 2013. "Income Mobility," SOEPpapers on Multidisciplinary Panel Data Research 607, DIW Berlin, The German Socio-Economic Panel (SOEP).
  6. Stephen Jenkins & Peter Lambert, 2011. "Robert Moffitt and Peter Gottschalk’s 1995 paper ‘Trends in the covariance structure of earnings in the US: 1969–1987’," Journal of Economic Inequality, Springer, vol. 9(3), pages 433-437, September.

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