Minu, Startu and all that:- Pitfalls in estimating the sensitivity of a worker's wage to aggregate unemployment
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.
|Date of creation:||14 Dec 2010|
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- Gary Solon & Robert Barsky & Jonathan A. Parker, 1992.
"Measuring the Cyclicality of Real Wages: How Important is Composition Bias,"
NBER Working Papers
4202, National Bureau of Economic Research, Inc.
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American Economic Review,
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- Lallemand, Thierry & Plasman, Robert & Rycx, Francois, 2005.
"The Establishment-Size Wage Premium: Evidence from European Countries,"
IZA Discussion Papers
1569, Institute for the Study of Labor (IZA).
- Thierry Lallemand & Robert Plasman & FranÃ§ois Rycx, 2007. "The establishment-size wage premium: evidence from European countries," Empirica, Springer, vol. 34(5), pages 427-451, December.
- Thierry Lallemand & Robert Plasman & François Rycx, 2005. "The establishment-size wage premium: evidence from European countries," DULBEA Working Papers 05-07.RS, ULB -- Universite Libre de Bruxelles.
- Thierry Lallemand & Robert Plasman & François Rycx, 2007. "The establishment-size wage premium: evidence from European countries," ULB Institutional Repository 2013/8735, ULB -- Universite Libre de Bruxelles.
- 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.
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