Advanced Search
MyIDEAS: Login to save this paper or follow this series

Modeling Earnings Dynamics

Contents:

Author Info

  • Joseph G. Altonji
  • Anthony Smith
  • Ivan Vidangos

Abstract

In this paper we use indirect inference to estimate a joint model of earnings, employment, job changes, wage rates, and work hours over a career. Our model incorporates duration dependence in several variables, multiple sources of unobserved heterogeneity, job-specific error components in both wages and hours, and measurement error. We use the model to address a number of important questions in labor economics, including the source of the experience profile of wages, the response of job changes to outside wage offers, and the effects of seniority on job changes. We provide estimates of the dynamic response of wage rates, hours, and earnings to various shocks and measure the relative contributions of the shocks to the variance of earnings in a given year and over a lifetime. We find that human capital accounts for most of the growth of earnings over a career although job seniority and job mobility also play significant roles. Unemployment shocks have a large impact on earnings in the short run as well a substantial long long-term effect that operates through the wage rate. Shocks associated with job changes and unemployment make a large contribution to the variance of career earnings and operate mostly through the job-specific error components in wages and hours.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.nber.org/papers/w14743.pdf
Download Restriction: no

Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14743.

as in new window
Length:
Date of creation: Feb 2009
Date of revision:
Publication status: published as Joseph G. Altonji & Anthony A. Smith Jr. & Ivan Vidangos, 2013. "Modeling Earnings Dynamics," Econometrica, Econometric Society, vol. 81(4), pages 1395-1454, 07.
Handle: RePEc:nbr:nberwo:14743

Note: EFG LS PE
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

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.:
as in new window
  1. Joseph G. Altonji & Charles R. Pierret, 1997. "Employer learning and statistical discrimination," Working Paper Series, Macroeconomic Issues, Federal Reserve Bank of Chicago WP-97-11, Federal Reserve Bank of Chicago.
  2. Fatih Guvenen & Anthony Smith, 2010. "Inferring Labor Income Risk from Economic Choices: An Indirect Inference Approach," NBER Working Papers 16327, National Bureau of Economic Research, Inc.
  3. Hause, John C, 1980. "The Fine Structure of Earnings and the On-the-Job Training Hypothesis," Econometrica, Econometric Society, Econometric Society, vol. 48(4), pages 1013-29, May.
  4. Joseph G. Altonji & Nicolas Williams, 1997. "Do Wages Rise with Job Seniority? A Reassessment," NBER Working Papers 6010, National Bureau of Economic Research, Inc.
  5. Flavio Cunha & James J. Heckman & Salvador Navarro, 2005. "Separating Uncertainty from Heterogeneity in Life Cycle Earnings," NBER Working Papers 11024, National Bureau of Economic Research, Inc.
  6. Per Krusell & Anthony A. Smith, Jr., 1999. "On the Welfare Effects of Eliminating Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 245-272, January.
  7. Storesletten, Kjetil & Telmer, Chris & Yaron, Amir, 2002. "Consumption and Risk Sharing Over the Life Cycle," Seminar Papers, Stockholm University, Institute for International Economic Studies 702, Stockholm University, Institute for International Economic Studies.
  8. 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, Elsevier, vol. 18(1), pages 83-114, January.
  9. Moshe Buchinsky & Denis Fougère & Francis Kramarz & Rusty Tchernis, 2002. "Interfirm Mobility, Wages and the Returns to Seniority and Experience in the U.S," Working Papers, Centre de Recherche en Economie et Statistique 2002-29, Centre de Recherche en Economie et Statistique.
  10. Per Krusell & Anthony A. Smith, Jr., . "Income and Wealth Heterogeneity in the Macroeconomy," GSIA Working Papers, Carnegie Mellon University, Tepper School of Business 1997-37, Carnegie Mellon University, Tepper School of Business.
  11. 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, University of Chicago Press, vol. 19(4), pages 799-836, October.
  12. Fabien Postel-Vinay & Helene Turon, 2006. "On-the-job Search, Productivity Shocks, and the Individual Earnings Process," 2006 Meeting Papers, Society for Economic Dynamics 5, Society for Economic Dynamics.
  13. Louis S. Jacobson & Robert J. LaLonde & Daniel G. Sullivan, 1992. "Earnings losses of displaced workers," Working Paper Series, Macroeconomic Issues, Federal Reserve Bank of Chicago 92-28, Federal Reserve Bank of Chicago.
  14. Jesper Bager & Francois Fontaine & Fabien Postel-Vinay & Jean-Marc Robin, 2006. "A Feasible Equilibrium Search Model of Individual Wage Dynamics with Experience Accumulation," 2006 Meeting Papers, Society for Economic Dynamics 679, Society for Economic Dynamics.
  15. Anthony A. Smith, Jr. & Michael Keane, 2004. "Generalized Indirect Inference for Discrete Choice Models," Econometric Society 2004 North American Winter Meetings 512, Econometric Society.
  16. Neal, Derek, 1995. "Industry-Specific Human Capital: Evidence from Displaced Workers," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 13(4), pages 653-77, October.
  17. Imrohoruglu, Ayse, 1989. "Cost of Business Cycles with Indivisibilities and Liquidity Constraints," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(6), pages 1364-83, December.
  18. Joseph G. Altonji & Christina H. Paxson, 1986. "Job Characteristics and Hours of Work," NBER Working Papers 1895, National Bureau of Economic Research, Inc.
  19. Abowd, J.M. & Kramarz, F. & Margolis, D.N., 1995. "High-Wage Workers and High-Wage Firms," Cahiers de recherche, Centre interuniversitaire de recherche en économie quantitative, CIREQ 9503, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  20. Luigi Pistaferri & Hamish Low & Costas Meghir, 2004. "Wage risk and employment risk over the life-cycle," 2004 Meeting Papers 82, Society for Economic Dynamics.
  21. John Fitzgerald & Peter Gottschalk & Robert Moffitt, 1998. "An Analysis of Sample Attrition in Panel Data: The Michigan Panel Study of Income Dynamics," Journal of Human Resources, University of Wisconsin Press, vol. 33(2), pages 251-299.
  22. Bound, John & Brown, Charles & Mathiowetz, Nancy, 2001. "Measurement error in survey data," Handbook of Econometrics, Elsevier, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 5, chapter 59, pages 3705-3843 Elsevier.
  23. Lillard, Lee A & Weiss, Yoram, 1979. "Components of Variation in Panel Earnings Data: American Scientists, 1960-70," Econometrica, Econometric Society, Econometric Society, vol. 47(2), pages 437-54, March.
  24. Blundell, Richard & Macurdy, Thomas, 1999. "Labor supply: A review of alternative approaches," Handbook of Labor Economics, Elsevier, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 27, pages 1559-1695 Elsevier.
  25. John Heaton & Deborah Lucas, 1993. "Evaluating the Effects of Incomplete Markets on Risk Sharing and Asset Pricing," NBER Working Papers 4249, National Bureau of Economic Research, Inc.
  26. Pierre-Olivier Gourinchas & Jonathan A. Parker, 2002. "Consumption Over the Life Cycle," Econometrica, Econometric Society, Econometric Society, vol. 70(1), pages 47-89, January.
  27. Meghir, Costas & Pistaferri, Luigi, 2002. "Income Variance Dynamics and Heterogeneity," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3632, C.E.P.R. Discussion Papers.
  28. Melissa Tartari, 2006. "Divorce and the cognitive achievement of children," 2006 Meeting Papers, Society for Economic Dynamics 32, Society for Economic Dynamics.
  29. �va Nagyp�l, 2007. "Learning by Doing vs. Learning About Match Quality: Can We Tell Them Apart?," Review of Economic Studies, Oxford University Press, vol. 74(2), pages 537-566.
  30. Hubbard, R Glenn & Skinner, Jonathan & Zeldes, Stephen P, 1994. "Expanding the Life-Cycle Model: Precautionary Saving and Public Policy," American Economic Review, American Economic Association, American Economic Association, vol. 84(2), pages 174-79, May.
  31. Ana Castaneda & Javier Diaz-Gimenez & Jose-Victor Rios-Rull, 2003. "Accounting for the U.S. Earnings and Wealth Inequality," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 111(4), pages 818-857, August.
  32. Cunha, Flavio & Heckman, James J., 2007. "Identifying and Estimating the Distributions of Ex Post and Ex Ante Returns to Schooling," Labour Economics, Elsevier, Elsevier, vol. 14(6), pages 870-893, December.
  33. Lillard, Lee A & Willis, Robert J, 1978. "Dynamic Aspects of Earning Mobility," Econometrica, Econometric Society, Econometric Society, vol. 46(5), pages 985-1012, September.
  34. Deaton, A., 1989. "Saving And Liquidity Constraints," Papers, Princeton, Woodrow Wilson School - Public and International Affairs 153, Princeton, Woodrow Wilson School - Public and International Affairs.
  35. Chris I. Telmer, 1991. "Asset Pricing Puzzles and Incomplete Markets," Working Papers, Queen's University, Department of Economics 806, Queen's University, Department of Economics.
  36. Kjetil Storesletten & Chris Telmer & Amir Yaron, 2007. "Asset Pricing with Idiosyncratic Risk and Overlapping Generations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(4), pages 519-548, October.
  37. Michael Baker & Gary Solon, 1999. "Earnings Dynamics and Inequality among Canadian Men, 1976-1992: Evidence from Longitudinal Income Tax Records," NBER Working Papers 7370, National Bureau of Economic Research, Inc.
  38. Altonji, Joseph G & Shakotko, Robert A, 1987. "Do Wages Rise with Job Seniority?," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 54(3), pages 437-59, July.
  39. Kjetil Storesletten & Chris I. Telmer & Amir Yaron, 2004. "Cyclical Dynamics in Idiosyncratic Labor Market Risk," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 112(3), pages 695-717, June.
  40. Abowd, John M & Card, David, 1989. "On the Covariance Structure of Earnings and Hours Changes," Econometrica, Econometric Society, Econometric Society, vol. 57(2), pages 411-45, March.
  41. Parent, Daniel, 2000. "Industry-Specific Capital and the Wage Profile: Evidence from the National Longitudinal Survey of Youth and the Panel Study of Income Dynamics," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 18(2), pages 306-23, April.
  42. John C. Ham & Kevin T. Reilly, 2002. "Testing Intertemporal Substitution, Implicit Contracts, and Hours Restriction Models of the Labor Market Using Micro Data," American Economic Review, American Economic Association, American Economic Association, vol. 92(4), pages 905-927, September.
  43. Storesletten, Kjetil & Telmer, Chris I. & Yaron, Amir, 2001. "The welfare cost of business cycles revisited: Finite lives and cyclical variation in idiosyncratic risk," European Economic Review, Elsevier, Elsevier, vol. 45(7), pages 1311-1339.
  44. Richard Blundell & Ian Preston, 1997. "Consumption, inequality and income uncertainty," IFS Working Papers, Institute for Fiscal Studies W97/15, Institute for Fiscal Studies.
  45. Robert H. Topel, 1990. "Specific Capital, Mobility, and Wages: Wages Rise with Job Seniority," NBER Working Papers 3294, National Bureau of Economic Research, Inc.
  46. William J. Carrington, 1993. "Wage Losses for Displaced Workers: Is It Really the Firm That Matters?," Journal of Human Resources, University of Wisconsin Press, vol. 28(3), pages 435-462.
  47. Robert H. Topel & Michael P. Ward, 1988. "Job Mobility and the Careers of Young Men," NBER Working Papers 2649, National Bureau of Economic Research, Inc.
  48. Robert Gibbons & Lawrence Katz, 1989. "Layoffs and Lemons," Working Papers, Princeton University, Department of Economics, Industrial Relations Section. 629, Princeton University, Department of Economics, Industrial Relations Section..
  49. Kjetil Storesletten & Chris Telmer & Amir Yaron, . "Asset pricing with idiosyncratic risk and overlapping generations," GSIA Working Papers, Carnegie Mellon University, Tepper School of Business 226, Carnegie Mellon University, Tepper School of Business.
  50. Gourieroux, C. & Monfort, A. & Renault, E., 1992. "Indirect Inference," Papers, Toulouse - GREMAQ 92.279, Toulouse - GREMAQ.
  51. Robert Moffitt & Peter Gottschalk, 2008. "Trends in the Transitory Variance of Male Earnings in the U.S., 1970-2004," Boston College Working Papers in Economics, Boston College Department of Economics 697, Boston College Department of Economics.
  52. Farber, Henry S., 1999. "Mobility and stability: The dynamics of job change in labor markets," Handbook of Labor Economics, Elsevier, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 37, pages 2439-2483 Elsevier.
  53. Postel-Vinay, Fabien & Robin, Jean-Marc, 2002. "Equilibrium Wage Dispersion with Worker and Employer Heterogeneity," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3548, C.E.P.R. Discussion Papers.
  54. Huggett, Mark, 1996. "Wealth distribution in life-cycle economies," Journal of Monetary Economics, Elsevier, Elsevier, vol. 38(3), pages 469-494, December.
  55. Aiyagari, S Rao, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 109(3), pages 659-84, August.
  56. Kjetil Storesletten & Chris Telmer & Amir Yaron, 1997. "Consumption and risk sharing over the life cycle," GSIA Working Papers, Carnegie Mellon University, Tepper School of Business 228, Carnegie Mellon University, Tepper School of Business.
  57. Fatih Guvenen, 2006. "Learning your earning: are labor income shocks really very persistent?," Discussion Paper / Institute for Empirical Macroeconomics, Federal Reserve Bank of Minneapolis 145, Federal Reserve Bank of Minneapolis.
  58. Abowd, John M & Card, David, 1987. "Intertemporal Labor Supply and Long-term Employment Contracts," American Economic Review, American Economic Association, American Economic Association, vol. 77(1), pages 50-68, March.
  59. Gadi Barlevy, 2008. "Identification of Search Models using Record Statistics," Review of Economic Studies, Oxford University Press, vol. 75(1), pages 29-64.
  60. Richard Blundell & Luigi Pistaferri & Ian Preston, 2004. "Consumption inequality and partial insurance," IFS Working Papers, Institute for Fiscal Studies W04/28, Institute for Fiscal Studies.
  61. Gueorgui Kambourov & Iourii Manovskii, 2009. "Occupational Specificity Of Human Capital," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(1), pages 63-115, 02.
  62. Kjetil Storesletten & Chris I. Telmer & Amir Yaron, 2001. "How Important Are Idiosyncratic Shocks? Evidence from Labor Supply," American Economic Review, American Economic Association, American Economic Association, vol. 91(2), pages 413-417, May.
  63. Lori G. Kletzer, 1998. "Job Displacement," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 12(1), pages 115-136, Winter.
  64. Uta Schönberg, 2007. "Testing for Asymmetric Employer Learning," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 25, pages 651-691.
  65. Smith, A A, Jr, 1993. "Estimating Nonlinear Time-Series Models Using Simulated Vector Autoregressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 8(S), pages S63-84, Suppl. De.
  66. Stevens, Ann Huff, 1997. "Persistent Effects of Job Displacement: The Importance of Multiple Job Losses," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 15(1), pages 165-88, January.
  67. Neal, Derek, 1999. "The Complexity of Job Mobility among Young Men," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 17(2), pages 237-61, April.
  68. Geweke, John & Keane, Michael, 2000. "An empirical analysis of earnings dynamics among men in the PSID: 1968-1989," Journal of Econometrics, Elsevier, Elsevier, vol. 96(2), pages 293-356, June.
  69. Senesky, Sarah, 2005. "Testing the intertemporal labor supply model: are jobs important?," Labour Economics, Elsevier, Elsevier, vol. 12(6), pages 749-772, December.
  70. Baker, Michael, 1997. "Growth-Rate Heterogeneity and the Covariance Structure of Life-Cycle Earnings," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 15(2), pages 338-75, April.
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 in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:14743. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

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 references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.

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