IDEAS home Printed from https://ideas.repec.org/p/may/mayecw/n208-10.pdf.html
   My bibliography  Save this paper

Identification of the Covariance Structure of Earnings using the GMM Estimator

Author

Listed:
  • Aedin Doris

    (Economics,Finance and Accounting National University of Ireland, Maynooth)

  • Donal O'Neill

    (Economics,Finance and Accounting National University of Ireland,)

  • Olive Sweetman

    (Economics,Finance and Accounting National University of Ireland,)

Abstract

In this paper we study the performance of the GMM estimator in the context of the covariance structure of earnings. Using analytical and Monte Carlo techniques we examine the sensitivity of parameter identification to key features such as panel length, sample size, the degree of persistence of earnings shocks and the evolution of inequality over time. We show that the interaction of transitory persistence with the time pattern of inequality determines identification in these models and offer some practical recommendations that follow from our findings.

Suggested Citation

  • Aedin Doris & Donal O'Neill & Olive Sweetman, 2010. "Identification of the Covariance Structure of Earnings using the GMM Estimator," Economics Department Working Paper Series n208-10.pdf, Department of Economics, National University of Ireland - Maynooth.
    • Handle: RePEc:may:mayecw:n208-10.pdf
    as

    Download full text from publisher

    File URL: http://repec.maynoothuniversity.ie/mayecw-files/N208-10.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Santos, Antonio Loureiro & Souza, André Portela, 2007. "Earnings Inequality in Brazil: Is it Permanent or Transitory?," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 27(2), November.
    2. Denisa Maria Sologon & Cathal O'Donoghue, 2009. "Earnings Dynamics and Inequality in EU, 1994-2001," SOEPpapers on Multidisciplinary Panel Data Research 184, DIW Berlin, The German Socio-Economic Panel (SOEP).
    3. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
    4. Fatih Guvenen, 2009. "An Empirical Investigation of Labor Income Processes," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(1), pages 58-79, January.
    5. Cappellari, Lorenzo, 2002. "Earnings dynamics and uncertainty in Italy: how do they differ between the private and public sectors?," Labour Economics, Elsevier, vol. 9(4), pages 477-496, September.
    6. Altonji, Joseph G & Segal, Lewis M, 1996. "Small-Sample Bias in GMM Estimation of Covariance Structures," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(3), pages 353-366, July.
    7. Michael Baker & Gary Solon, 2003. "Earnings Dynamics and Inequality among Canadian Men, 1976-1992: Evidence from Longitudinal Income Tax Records," Journal of Labor Economics, University of Chicago Press, vol. 21(2), pages 267-288, April.
    8. Doris, Aedin & O'Neill, Donal & Sweetman, Olive, 2008. "Does Growth Affect the Nature of Inequality? Ireland 1994–2001," IZA Discussion Papers 3701, Institute of Labor Economics (IZA).
    9. Marco Lilla & Stefano Staffolani, 2009. "The evolution of wage inequality in Italy," Applied Economics, Taylor & Francis Journals, vol. 41(15), pages 1873-1892.
    10. Giovanni L. Violante, 2002. "Technological Acceleration, Skill Transferability, and the Rise in Residual Inequality," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(1), pages 297-338.
    11. Aedın Doris & Donal O’Neill & Olive Sweetman, 2011. "GMM estimation of the covariance structure of longitudinal data on earnings," Stata Journal, StataCorp LP, vol. 11(3), pages 439-459, September.
    12. Richard Blundell & Stephen Bond, 2000. "GMM Estimation with persistent panel data: an application to production functions," Econometric Reviews, Taylor & Francis Journals, vol. 19(3), pages 321-340.
    13. Myck, Michal & Ochmann, Richard & Qari, Salmai, 2008. "Dynamics of Earnings and Hourly Wages in Germany," IZA Discussion Papers 3751, Institute of Labor Economics (IZA).
    14. Magnus Gustavsson, 2007. "The 1990s rise in Swedish earnings inequality -- persistent or transitory?," Applied Economics, Taylor & Francis Journals, vol. 39(1), pages 25-30.
    15. Stéphane Bonhomme & Jean-Marc Robin, 2009. "Assessing the Equalizing Force of Mobility Using Short Panels: France, 1990-2000," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 76(1), pages 63-92.
    16. MaCurdy, Thomas E., 1982. "The use of time series processes to model the error structure of earnings in a longitudinal data analysis," Journal of Econometrics, Elsevier, vol. 18(1), pages 83-114, January.
    17. Lorenzo Cappellari, 2000. "The Covariance Structure of Italian Male Wages," Manchester School, University of Manchester, vol. 68(6), pages 659-684, December.
    18. Haider, Steven J, 2001. "Earnings Instability and Earnings Inequality of Males in the United States: 1967-1991," Journal of Labor Economics, University of Chicago Press, vol. 19(4), pages 799-836, October.
    19. María Cervini-Plá & Xavier Ramos, 2012. "Long-Term Earnings Inequality, Earnings Instability and Temporary Employment in Spain: 1993–2000," British Journal of Industrial Relations, London School of Economics, vol. 50(4), pages 714-736, December.
    20. Stock, James H & Wright, Jonathan H & Yogo, Motohiro, 2002. "A Survey of Weak Instruments and Weak Identification in Generalized Method of Moments," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(4), pages 518-529, October.
    21. Cameron,A. Colin & Trivedi,Pravin K., 2005. "Microeconometrics," Cambridge Books, Cambridge University Press, number 9780521848053.
    22. Clark, Todd E, 1996. "Small-Sample Properties of Estimators of Nonlinear Models of Covariance Structure," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(3), pages 367-373, July.
    23. James H. Stock & Jonathan Wright, 2000. "GMM with Weak Identification," Econometrica, Econometric Society, vol. 68(5), pages 1055-1096, September.
    24. Baker, Michael, 1997. "Growth-Rate Heterogeneity and the Covariance Structure of Life-Cycle Earnings," Journal of Labor Economics, University of Chicago Press, vol. 15(2), pages 338-375, April.
    25. Dickens, Richard, 2000. "The Evolution of Individual Male Earnings in Great Britain: 1975-95," Economic Journal, Royal Economic Society, vol. 110(460), pages 27-49, January.
    26. Adriaan S. Kalwij & Rob Alessie, 2007. "Permanent and transitory wages of British men, 1975-2001: year, age and cohort effects," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(6), pages 1063-1093.
    27. Magnus Gustavsson, 2008. "A New Picture Of Swedish Earnings Inequality: Persistent And Transitory Components, 1960–1990," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 54(3), pages 324-349, September.
    28. Xavier Ramos, 2003. "The Covariance Structure of Earnings in Great Britain, 1991-1999," Economica, London School of Economics and Political Science, vol. 70(278), pages 353-374, May.
    29. Lorenzo Cappellari, 2004. "The Dynamics and Inequality of Italian Men’s Earnings: Long-term Changes or Transitory Fluctuations?," Journal of Human Resources, University of Wisconsin Press, vol. 39(2).
    30. Kocherlakota, Narayana R., 1990. "On tests of representative consumer asset pricing models," Journal of Monetary Economics, Elsevier, vol. 26(2), pages 285-304, October.
    31. Aedin Doris & Donal O'Neill & Olive Sweetman, 2010. "Aggregate Earnings Inequality in Europe: Permanent Differences or Transitory Fluctuations?," Economics Department Working Paper Series n211-10.pdf, Department of Economics, National University of Ireland - Maynooth.
    32. Stéphane Bonhomme & Jean-Marc Robin, 2009. "Assessing the equalizing force of mobility using short panels: France, 1990-2000," Post-Print hal-00308801, HAL.
    33. Sologon, Denisa Maria & O'Donoghue, Cathal, 2010. "Earnings Dynamics and Inequality among Men in Luxembourg, 1988-2004: Evidence from Administrative Data," IZA Discussion Papers 5014, Institute of Labor Economics (IZA).
    34. Daly, Mary C. & Valletta, Robert G., 2008. "Cross-national trends in earnings inequality and instability," Economics Letters, Elsevier, vol. 99(2), pages 215-219, May.
    35. Pozzi, Lorenzo, 2003. "The coefficient of relative risk aversion: a Monte Carlo study investigating small sample estimator problems," Economic Modelling, Elsevier, vol. 20(5), pages 923-940, September.
    36. Hansen, Lars Peter & Heaton, John & Yaron, Amir, 1996. "Finite-Sample Properties of Some Alternative GMM Estimators," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(3), pages 262-280, July.
    37. Cappellari, Lorenzo, 2000. "The Covariance Structure of Italian Male Wages," Manchester School, University of Manchester, vol. 68(6), pages 659-684, December.
    38. Robert A. Moffitt & Peter Gottschalk, 2002. "Trends in the Transitory Variance of Earnings in the United States," Economic Journal, Royal Economic Society, vol. 112(478), pages 68-73, March.
    39. Stéphane Bonhomme & Jean-Marc Robin, 2009. "Assessing the equalizing force of mobility using short panels: France, 1990-2000," PSE-Ecole d'économie de Paris (Postprint) hal-00308801, HAL.
    40. Tauchen, George, 1986. "Statistical Properties of Generalized Method-of-Moments Estimators of Structural Parameters Obtained from Financial Market Data," Journal of Business & Economic Statistics, American Statistical Association, vol. 4(4), pages 397-416, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. SOLOGON Denisa & VAN KERM Philippe, 2014. "Earnings dynamics, foreign workers and the stability of inequality trends in Luxembourg 1988-2009," LISER Working Paper Series 2014-03, Luxembourg Institute of Socio-Economic Research (LISER).
    2. Markus Jäntti & Stephen P. Jenkins, 2013. "Income Mobility," SOEPpapers on Multidisciplinary Panel Data Research 607, DIW Berlin, The German Socio-Economic Panel (SOEP).
    3. Otto Kässi, 2014. "Earnings dynamics of men and women in Finland: permanent inequality versus earnings instability," Empirical Economics, Springer, vol. 46(2), pages 451-477, March.
    4. 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’," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 9(3), pages 433-437, September.
    5. Maurice J.G. Bun & Jasper Winter, 2022. "Capital and labor misallocation in the Netherlands," Journal of Productivity Analysis, Springer, vol. 57(1), pages 93-113, February.
    6. Cappellari, Lorenzo & Jenkins, Stephen P., 2014. "Earnings and labour market volatility in Britain, with a transatlantic comparison," Labour Economics, Elsevier, vol. 30(C), pages 201-211.
    7. Gustafsson, Johan & Holmberg, Johan, 2022. "Permanent and transitory earnings dynamics and lifetime income inequality in Sweden," Umeå Economic Studies 1005, Umeå University, Department of Economics.
    8. P. Jenkins, Stephen & Cappellari, Lorenzo, 2013. "Earnings and labour market volatility in Britain," ISER Working Paper Series 2013-10, Institute for Social and Economic Research.
    9. Cappellari, Lorenzo & Jenkins, Stephen P., 2014. "Earnings and labour market volatility in Britain, with a transatlantic comparison," Labour Economics, Elsevier, vol. 30(C), pages 201-211.
    10. Gustafsson, Johan & Holmberg, Johan, 2019. "Earning dynamics in Sweden: The recent evolution of permanent inequality and earnings volatility," Umeå Economic Studies 963, Umeå University, Department of Economics.
    11. Maurice Bun & Jasper de Winter, 2019. "Measuring trends and persistence in capital and labor misallocation," DNB Working Papers 639, Netherlands Central Bank, Research Department.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. 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’," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 9(3), pages 433-437, September.
    2. Otto Kässi, 2014. "Earnings dynamics of men and women in Finland: permanent inequality versus earnings instability," Empirical Economics, Springer, vol. 46(2), pages 451-477, March.
    3. Giesecke, Matthias & Bönke, Timm & Lüthen, Holger, 2011. "The Dynamics of Earnings in Germany: Evidence from Social Security Records," VfS Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48692, Verein für Socialpolitik / German Economic Association.
    4. Gustafsson, Johan & Holmberg, Johan, 2019. "Earning dynamics in Sweden: The recent evolution of permanent inequality and earnings volatility," Umeå Economic Studies 963, Umeå University, Department of Economics.
    5. Doris, Aedin & O'Neill, Donal & Sweetman, Olive, 2008. "Does Growth Affect the Nature of Inequality? Ireland 1994–2001," IZA Discussion Papers 3701, Institute of Labor Economics (IZA).
    6. Gustafsson, Johan & Holmberg, Johan, 2022. "Permanent and transitory earnings dynamics and lifetime income inequality in Sweden," Umeå Economic Studies 1005, Umeå University, Department of Economics.
    7. Cappellari, Lorenzo & Jenkins, Stephen P., 2014. "Earnings and labour market volatility in Britain, with a transatlantic comparison," Labour Economics, Elsevier, vol. 30(C), pages 201-211.
    8. Magnac, Thierry & Pistolesi, Nicolas & Roux, Sébastien, 2013. "Post schooling human capital investments and the life cycle variance of earnings," TSE Working Papers 13-380, Toulouse School of Economics (TSE).
    9. Denisa Maria Sologon & Cathal O'Donoghue, 2009. "Earnings Dynamics and Inequality in EU, 1994-2001," SOEPpapers on Multidisciplinary Panel Data Research 184, DIW Berlin, The German Socio-Economic Panel (SOEP).
    10. Higgins, Tim & Sinning, Mathias, 2013. "Modeling income dynamics for public policy design: An application to income contingent student loans," Economics of Education Review, Elsevier, vol. 37(C), pages 273-285.
    11. Michal Myck & Richard Ochmann & Salmai Qari, 2008. "Dynamics of Earnings and Hourly Wages in Germany," SOEPpapers on Multidisciplinary Panel Data Research 139, DIW Berlin, The German Socio-Economic Panel (SOEP).
    12. Mishra, Aswini Kumar & Gupta, Akul & Bhardwaj, Vedant, 2022. "Permanent inequality versus earnings instability and transmission of income shocks to consumption expenditure in India," The Quarterly Review of Economics and Finance, Elsevier, vol. 84(C), pages 80-91.
    13. Mirko Felchner, 2015. "Einkommensdynamik bei Selbständigen als Freie Berufe und abhängig Beschäftigte Eine dynamische Paneldatenschätzung mit Daten des Sozio-oekonomischen Panels," FFB-Discussionpaper 101, Research Institute on Professions (Forschungsinstitut Freie Berufe (FFB)), LEUPHANA University Lüneburg.
    14. Cappellari, Lorenzo & Jenkins, Stephen P., 2014. "Earnings and labour market volatility in Britain, with a transatlantic comparison," Labour Economics, Elsevier, vol. 30(C), pages 201-211.
    15. Cappellari, Lorenzo & Jenkins, Stephen P., 2013. "Earnings and Labour Market Volatility in Britain," IZA Discussion Papers 7491, Institute of Labor Economics (IZA).
    16. Denisa Maria Sologon & O'Donoghue, Cathal, 2011. "Shaping earnings instability: labour market policy and institutional factors," MERIT Working Papers 2011-077, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    17. Joseph Altonji & Disa Hynsjo & Ivan Vidangos, 2023. "Individual Earnings and Family Income: Dynamics and Distribution," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 49, pages 225-250, July.
    18. Denisa Maria Sologon & Cathal O'Donoghue, 2014. "Shaping Earnings Insecurity: Labor Market Policy and Institutional Factors," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 60(S1), pages 205-232, May.
    19. Charles M. Beach & Ross Finnie & David Gray, 2010. "Long‐Run Inequality And Short‐Run Instability Of Men'S And Women'S Earnings In Canada," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 56(3), pages 572-596, September.
    20. Masakatsu Okubo, 2015. "Earnings Dynamics and Profile Heterogeneity: Estimates from Japanese Panel Data," The Japanese Economic Review, Japanese Economic Association, vol. 66(1), pages 112-146, March.

    More about this item

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:may:mayecw:n208-10.pdf. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/demayie.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.