Minu, Startu and All That: Pitfalls in Estimating the Sensitivity of a Worker's Wage to Aggregate Unemployment
AbstractIn this paper we show that panel estimates of tenure specific sensitivity to the business cycle of wages is subject to serious pitfalls. Three canonical variates used in the literature â the minimum unemployment rate during a workerâs time at the firm (min u), the unemployment rate at the start of her tenure (Su) and the current unemployment rate interacted with a new hire dummy (δu) â can all be significant and "correctly" signed even when each worker in the firm receives the same wage, regardless of tenure (equal treatment). In matched data the problem can be resolved by the inclusion in the panel of firm-year interaction dummies. In unmatched data where this is not possible, we propose a solution for min u and Su based on Solon, Barsky and Parker's (1994) two step method. Our proposed solution method is however suboptimal because it removes a lot of potentially informative variation in average wages. Unfortunately δu cannot be identified in unmatched data because a differential wage response to unemployment of new hires and incumbents will appear under both equal treatment and unequal treatment.
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Bibliographic InfoPaper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5503.
Length: 42 pages
Date of creation: Feb 2011
Date of revision:
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Other versions of this item:
- Pedro Martins & Andy Snell & Jonathan Thomas, 2011. "Minu, Startu and all that:- Pitfalls in estimating the sensitivity of a worker’s wage to aggregate unemployment," ESE Discussion Papers 199, Edinburgh School of Economics, University of Edinburgh.
- J50 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - General
- J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
- C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-02-26 (All new papers)
- NEP-BEC-2011-02-26 (Business Economics)
- NEP-LAB-2011-02-26 (Labour Economics)
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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