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

  • Gustavsson, Magnus

    ()

    (Department of Economics)

  • Österholm, Pär

    ()

    (National Institute of Economic Research)

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.

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Paper provided by Uppsala University, Department of Economics in its series Working Paper Series with number 2010:21.

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Length: 26 pages
Date of creation: 09 Dec 2010
Date of revision:
Handle: RePEc:hhs:uunewp:2010_021
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Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden

Phone: + 46 18 471 25 00
Fax: + 46 18 471 14 78
Web page: http://www.nek.uu.se/
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