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Does the Labor-Income Process Contain a Unit Root? Evidence from Individual-Specific Time Series

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  • Gustavsson, Magnus

    () (Department of Economics)

  • Österholm, Pär

    () (National Institute of Economic Research)

Abstract

Employing econometric methods for univariate time series, this paper investigates the empirical validity of assuming a unit root in individuals’ labor-income processes. Using a Swedish register-based longitudinal dataset which allows us to follow a cohort of workers from 1968 to 2005, we are able to obtain distributions of median unbiased estimates of localto- unity parameters. The results indicate that earnings for the representative worker are governed by a process where shocks to earnings have fairly high persistence but are both economically and statistically significantly different from having permanent effects; that is, the largest autoregressive root is less than unity. These results add to the studies that question the heavy use of unit-root processes for earnings in calibrations of life-cycle models.

Suggested Citation

  • Gustavsson, Magnus & Österholm, Pär, 2010. "Does the Labor-Income Process Contain a Unit Root? Evidence from Individual-Specific Time Series," Working Paper Series 2010:21, Uppsala University, Department of Economics.
  • Handle: RePEc:hhs:uunewp:2010_021
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    Cited by:

    1. Fatih Guvenen, 2011. "Macroeconomics with hetereogeneity : a practical guide," Economic Quarterly, Federal Reserve Bank of Richmond, issue 3Q, pages 255-326.
    2. repec:fip:fedreq:y:2011:i:3q:p:255-326:n:vol.97no.3 is not listed on IDEAS
    3. Kazufumi Yamana, "undated". "Structural Household Finance," Discussion papers ron279, Policy Research Institute, Ministry of Finance Japan.
    4. Sarah Meyer & Mark Trede, 2016. "Explosive earnings dynamics: Whoever has will be given more," CQE Working Papers 4716, Center for Quantitative Economics (CQE), University of Muenster.

    More about this item

    Keywords

    Idiosyncratic income risk; Unit-root model; Earnings dynamics; Local-to-unity parameter;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • 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

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