IDEAS home Printed from https://ideas.repec.org/p/bde/wpaper/0738.html
   My bibliography  Save this paper

Modelling heterogeneity and dynamics in the volatility of individual wages

Author

Listed:
  • Laura Hospido

    () (Banco de España)

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 over T squared. 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.

Suggested Citation

  • Laura Hospido, 2007. "Modelling heterogeneity and dynamics in the volatility of individual wages," Working Papers 0738, Banco de España;Working Papers Homepage.
  • Handle: RePEc:bde:wpaper:0738
    as

    Download full text from publisher

    File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/07/Fic/dt0738e.pdf
    File Function: First version, December 2007
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Martin J. Osborne & Al Slivinski, 1996. "A Model of Political Competition with Citizen-Candidates," The Quarterly Journal of Economics, Oxford University Press, pages 65-96.
    2. Costas Meghir & Luigi Pistaferri, 2001. "Income variance dynamics and heterogenity," IFS Working Papers W01/07, Institute for Fiscal Studies.
    3. Joel L. Horowitz & Marianthi Markatou, 1993. "Semiparametric Estimation Of Regression Models For Panel Data," Econometrics 9309001, EconWPA.
    4. Costas Meghir & Frank Windmeijer, 1999. "Moment Conditions for Dynamic Panel Data Models with Multiplicative Individual Effects in the Conditional Variance," Annals of Economics and Statistics, GENES, pages 317-330.
    5. Peter Gottschalk & Robert Moffitt, 2009. "The Rising Instability of U.S. Earnings," Journal of Economic Perspectives, American Economic Association, pages 3-24.
    6. 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, pages 83-114.
    7. Martin Browning & Mette Ejrnæs & Javier Alvarez, 2010. "Modelling Income Processes with Lots of Heterogeneity," Review of Economic Studies, Oxford University Press, vol. 77(4), pages 1353-1381.
    8. Costas Meghir & Luigi Pistaferri, 2004. "Income Variance Dynamics and Heterogeneity," Econometrica, Econometric Society, vol. 72(1), pages 1-32, January.
    9. Arellano, Manuel & Honore, Bo, 2001. "Panel data models: some recent developments," Handbook of Econometrics,in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 5, chapter 53, pages 3229-3296 Elsevier.
    10. Javier Alvarez & Manuel Arellano, 2004. "Robust Likelihood Estimation Of Dynamic Panel Data Models," Working Papers wp2004_0421, CEMFI.
    11. Joel L. Horowitz, 2003. "Bootstrap Methods for Markov Processes," Econometrica, Econometric Society, vol. 71(4), pages 1049-1082, July.
    12. Manuel Arellano, 2003. "Discrete choices with panel data," Investigaciones Economicas, Fundación SEPI, pages 423-458.
    13. Lillard, Lee A & Willis, Robert J, 1978. "Dynamic Aspects of Earning Mobility," Econometrica, Econometric Society, vol. 46(5), pages 985-1012, September.
    14. Costas Meghir & Frank Windmeijer, 1997. "Moment conditions for dynamic panel data models with multiplicative individual effects in the conditional variance," IFS Working Papers W97/21, Institute for Fiscal Studies.
    15. 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.
    16. Geert Dhaene & Koen Jochmans, 2015. "Split-panel Jackknife Estimation of Fixed-effect Models," Review of Economic Studies, Oxford University Press, vol. 82(3), pages 991-1030.
    17. Manuel Arellano & Stéphane Bonhomme, 2009. "Robust Priors in Nonlinear Panel Data Models," Econometrica, Econometric Society, vol. 77(2), pages 489-536, 03.
    18. 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, pages 251-299.
    19. Fernández-Val, Iván, 2009. "Fixed effects estimation of structural parameters and marginal effects in panel probit models," Journal of Econometrics, Elsevier, pages 71-85.
    20. Pranab Bardhan & Dilip Mookherjee, 2005. "Decentralization, Corruption and Government Accountability: An Overview," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-152, Boston University - Department of Economics.
    21. David H. Autor & Lawrence F. Katz & Melissa S. Kearney, 2008. "Trends in U.S. Wage Inequality: Revising the Revisionists," The Review of Economics and Statistics, MIT Press, pages 300-323.
    22. Abowd, John M & Card, David, 1989. "On the Covariance Structure of Earnings and Hours Changes," Econometrica, Econometric Society, vol. 57(2), pages 411-445, March.
    23. Joel L. Horowitz & Marianthi Markatou, 1996. "Semiparametric Estimation of Regression Models for Panel Data," Review of Economic Studies, Oxford University Press, vol. 63(1), pages 145-168.
    24. Chamberlain, Gary, 1984. "Panel data," Handbook of Econometrics,in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 22, pages 1247-1318 Elsevier.
    25. Carro, Jesus M., 2007. "Estimating dynamic panel data discrete choice models with fixed effects," Journal of Econometrics, Elsevier, pages 503-528.
    26. Hahn, Jinyong & Kuersteiner, Guido, 2011. "Bias Reduction For Dynamic Nonlinear Panel Models With Fixed Effects," Econometric Theory, Cambridge University Press, vol. 27(06), pages 1152-1191, December.
    27. Hall, Robert E & Mishkin, Frederic S, 1982. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," Econometrica, Econometric Society, vol. 50(2), pages 461-481, March.
    28. Bester, C. Alan & Hansen, Christian, 2009. "A Penalty Function Approach to Bias Reduction in Nonlinear Panel Models with Fixed Effects," Journal of Business & Economic Statistics, American Statistical Association, vol. 27(2), pages 131-148.
    29. Levy, Frank & Murnane, Richard J, 1992. "U.S. Earnings Levels and Earnings Inequality: A Review of Recent Trends and Proposed Explanations," Journal of Economic Literature, American Economic Association, pages 1333-1381.
    30. Martin Browning & Annamaria Lusardi, 1996. "Household Saving: Micro Theories and Micro Facts," Journal of Economic Literature, American Economic Association, pages 1797-1855.
    31. Peter Gottschalk & Robert Moffitt, 1994. "The Growth of Earnings Instability in the U.S. Labor Market," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, pages 217-272.
    32. Jinyong Hahn & Whitney K. Newey, 2003. "Jackknife and analytical bias reduction for nonlinear panel models," CeMMAP working papers CWP17/03, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    33. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, pages 307-327.
    34. Jinyong Hahn & Whitney Newey, 2004. "Jackknife and Analytical Bias Reduction for Nonlinear Panel Models," Econometrica, Econometric Society, vol. 72(4), pages 1295-1319, July.
    35. Ivan Fernandez-Val, 2005. "Estimation of Structural Parameters and Marginal Effects in Binary Choice Panel Data Models with Fixed Effects," Boston University - Department of Economics - Working Papers Series WP2005-38, Boston University - Department of Economics.
    36. Tiemen Woutersen, 2002. "Robustness against Incidental Parameters," UWO Department of Economics Working Papers 20028, University of Western Ontario, Department of Economics.
    37. Robert B. Barsky & F. Thomas Juster & Miles S. Kimball & Matthew D. Shapiro, 1997. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Study," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 537-579.
    38. Manuel Arellano & Jinyong Hahn, 2006. "A Likelihood-Based Approximate Solution To The Incidental Parameter Problem In Dynamic Nonlinear Models With Multiple Effects," Working Papers wp2006_0613, CEMFI.
    39. James Banks & Richard Blundell & Agar Brugiavini, 1999. "Risk pooling, precautionary saving and consumption growth," IFS Working Papers W99/19, Institute for Fiscal Studies.
    40. Katz, Lawrence F. & Autor, David H., 1999. "Changes in the wage structure and earnings inequality," Handbook of Labor Economics,in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 26, pages 1463-1555 Elsevier.
    41. Tony Lancaster, 2002. "Orthogonal Parameters and Panel Data," Review of Economic Studies, Oxford University Press, vol. 69(3), pages 647-666.
    42. Shane T. Jensen & Stephen H. Shore, 2008. "Changes in the Distribution of Income Volatility," Papers 0808.1090, arXiv.org.
    43. repec:adr:anecst:y:1999:i:55-56:p:08 is not listed on IDEAS
    44. James Banks & Richard Blundell & Agar Brugiavini, 2001. "Risk Pooling, Precautionary Saving and Consumption Growth," Review of Economic Studies, Oxford University Press, vol. 68(4), pages 757-779.
    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. Geert Dhaene & Koen Jochmans, 2015. "Split-panel Jackknife Estimation of Fixed-effect Models," Review of Economic Studies, Oxford University Press, vol. 82(3), pages 991-1030.
    2. Yusuke Kamishiro & Roberto Serrano, 2011. "Equilibrium Blocking in Large Quasilinear Economies," Mathematics of Operations Research, INFORMS, vol. 36(3), pages 552-567, August.
    3. Serrano, Roberto & Vohra, Rajiv, 2010. "Multiplicity of mixed equilibria in mechanisms: A unified approach to exact and approximate implementation," Journal of Mathematical Economics, Elsevier, pages 775-785.
    4. Geert Dhaene & Koen Jochmans, 2011. "Profile-score Adjustements for Nonlinearfixed-effect Models," Working Papers hal-01073733, HAL.
    5. Laura Hospido, 2012. "Estimating Nonlinear Models with Multiple Fixed Effects: A Computational Note," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 74(5), pages 760-775, October.
    6. Manuel Arellano & Stéphane Bonhomme, 2009. "Robust Priors in Nonlinear Panel Data Models," Econometrica, Econometric Society, vol. 77(2), pages 489-536, 03.
    7. Andini, Corrado, 2014. "Persistence Bias and Schooling Returns," IZA Discussion Papers 8143, Institute for the Study of Labor (IZA).
    8. repec:spo:wpecon:info:hdl:2441/eu4vqp9ompqllr09j0031f620 is not listed on IDEAS
    9. Charles F. Manski & Aleksey Tetenov, 2014. "The Quantile Performance Of Statistical Treatment Rules Using Hypothesis Tests To Allocate A Population To Two Treatments," Carlo Alberto Notebooks 361, Collegio Carlo Alberto.
    10. Rafael Repullo & Jesús Saurina & Carlos Trucharte, 2010. "Mitigating the pro-cyclicality of Basel II," Economic Policy, CEPR;CES;MSH, pages 659-702.
    11. Magnac, Thierry & Pistolesi, Nicolas & Roux, Sébastien, 2013. "Post Schooling Human Capital Investments and the Life Cycle Variance of Earnings," IZA Discussion Papers 7407, Institute for the Study of Labor (IZA).
    12. Joan Llull, 2008. "The Impact Of Immigration On Productivity," Working Papers wp2008_0802, CEMFI.
    13. Roberto Serrano, 2009. "On Watson's Non-Forcing Contracts and Renegotiation," Economics Bulletin, AccessEcon, vol. 29(3), pages 2350-2360.
    14. Irene Botosaru, 2017. "Identifying Distributions in a Panel Model with Heteroskedasticity: An Application to Earnings Volatility," Discussion Papers dp17-11, Department of Economics, Simon Fraser University.
    15. Manuel Arellano & Lars Peter Hansen & Enrique Sentana, 2009. "Underidentification? (Resumen)," Working Papers wp2009_0905, CEMFI.
    16. Hospido, Laura, 2015. "Wage dynamics in the presence of unobserved individual and job heterogeneity," Labour Economics, Elsevier, vol. 33(C), pages 81-93.
    17. Laura Hospido, 2009. "Job changes and individual-job specific wage dynamics," Working Papers 0907, Banco de España;Working Papers Homepage.
    18. Roland Pongou & Roberto Serrano, 2009. "A dynamic theory of fidelity networks with an application to the spread of HIV/AIDS," Working Papers 2009-03, Instituto Madrileño de Estudios Avanzados (IMDEA) Ciencias Sociales.

    More about this item

    Keywords

    Panel data; dynamic nonlinear models; conditional heteroskedasticity; fixed effects; bias reduction; individual wages;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

    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:bde:wpaper:0738. 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: (María Beiro. Electronic Dissemination of Information Unit. Research Department. Banco de España). General contact details of provider: http://www.bde.es/ .

    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 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.