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Minu, Startu and all that:- Pitfalls in estimating the sensitivity of a worker's wage to aggregate unemployment

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Abstract

In this paper we show that the inclusion of unemployment-tenure interaction variates in Mincer wage equations is subject to serious pitfalls. These variates were designed to test whether or not the sensitivity to the business cycle of a worker's wage varies according to her tenure. We show that three canonical variates used in the literature - the minimum unemployment rate during a worker's 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(du) - 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. This method is sub-optimal because it ignores a large amount of cross tenure variation in average wages and is only valid when the scaled covariances of firm wages and firm employment are acyclical. Unfortunately du 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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  • Pedro Martins & Andy Snell & Jonathan Thomas, 2010. "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.
  • Handle: RePEc:edn:esedps:199
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    1. Pierre Cahuc & Fabien Postel-Vinay & Jean-Marc Robin, 2006. "Wage Bargaining with On-the-Job Search: Theory and Evidence," Econometrica, Econometric Society, vol. 74(2), pages 323-364, March.
    2. Gary Solon & Robert Barsky & Jonathan A. Parker, 1994. "Measuring the Cyclicality of Real Wages: How Important is Composition Bias?," The Quarterly Journal of Economics, Oxford University Press, vol. 109(1), pages 1-25.
    3. Thierry Lallemand & Robert Plasman & François Rycx, 2007. "The establishment-size wage premium: evidence from European countries," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 34(5), pages 427-451, December.
    4. George Baker & Michael Gibbs & Bengt Holmstrom, 1994. "The Wage Policy of a Firm," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 921-955.
    5. Darren Grant, 2003. "The Effect of Implicit Contracts on the Movement of Wages over the Business Cycle: Evidence from the National Longitudinal Surveys," ILR Review, Cornell University, ILR School, vol. 56(3), pages 393-408, April.
    6. Esteban Rossi-Hansberg & Mark L. J. Wright, 2007. "Establishment Size Dynamics in the Aggregate Economy," American Economic Review, American Economic Association, vol. 97(5), pages 1639-1666, December.
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    JEL classification:

    • 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

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