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Modelling Heterogeneity And Dynamics In The Volatility Of Individual Wages

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Author Info
Laura Hospido () (CEMFI, Centro de Estudios Monetarios y Financieros)

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Abstract

In this paper I consider a model for the heterogeneity and dynamics of the conditional mean and the conditional variance of standarized individual wages. In particular, I propose a dynamic panel data model with individual effects both in the mean and in a conditional ARCH type variance function. I posit a distribution for earning shocks and I build a modified likelihood function for estimation and inference in a fixed- T context. Using a newly developed bias-corrected likelihood approach makes it possible to reduce the estimation bias to a term of order 1/ T2. The small sample performance of bias corrected estimators is investigated in a Monte Carlo simulation study. The simulation results show that the bias of the maximum likelihood estimator is substantially corrected for designs that are broadly calibrated to the PSID. The empirical analysis is conducted on data drawn from the 1968-1993 PSID. I find that it is important to account for individual unobserved heterogeneity and dynamics in the variance, and that the latter is driven by job mobility. I also find that the model explains the non-normality observed in logwage data.

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Paper provided by CEMFI in its series Working Papers with number wp2007_0717.

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Date of creation: Dec 2007
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Handle: RePEc:cmf:wpaper:wp2007_0717

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Related research
Keywords: Panel data; dynamic nonlinear models; conditional heteroskedasticity; fixed effects; bias reduction; individual wages.;

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Find related papers by JEL classification:
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Manuel Arellano & Stephane Bonhomme, 2006. "Robust Priors In Nonlinear Panel Data Models," Working Papers wp2006_0614, CEMFI. [Downloadable!]
    Other versions:
  2. Laura Hospido, 2009. "Job changes and individual-job specific wage dynamics," Banco de España Working Papers 0907, Banco de España. [Downloadable!]
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This page was last updated on 2009-11-16.

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