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Modelling Heterogeneity and Dynamics in the Volatility of Individual Wages


  • Hospido, Laura

    () (Bank of Spain)


This paper presents a model for the heterogeneity and dynamics of the conditional mean and the conditional variance of standardized individual wages. In particular, a heteroskedastic autoregressive model with multiple individual fixed effects is proposed. The expression for a modified likelihood function is obtained for estimation and inference in a fixed-T context. Using a bias-corrected likelihood approach makes it possible to reduce the estimation bias to a term of order 1/T². The small sample performance of the bias corrected estimator 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 data used in the empirical analysis, drawn from the 1968-1993 Panel Study of Income Dynamics. The empirical results show that it is important to account for individual unobserved heterogeneity and dynamics in the variance, and that the latter is driven by job mobility. The model also explains the non-normality observed in logwage data.

Suggested Citation

  • Hospido, Laura, 2010. "Modelling Heterogeneity and Dynamics in the Volatility of Individual Wages," IZA Discussion Papers 4712, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp4712

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    References listed on IDEAS

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    Cited by:

    1. Yusuke Kamishiro & Roberto Serrano, 2011. "Equilibrium Blocking in Large Quasilinear Economies," Mathematics of Operations Research, INFORMS, vol. 36(3), pages 552-567, August.
    2. Manuel Arellano & Stéphane Bonhomme, 2009. "Robust Priors in Nonlinear Panel Data Models," Econometrica, Econometric Society, vol. 77(2), pages 489-536, March.
    3. Roberto Serrano, 2009. "On Watson's Non-Forcing Contracts and Renegotiation," Economics Bulletin, AccessEcon, vol. 29(3), pages 2350-2360.
    4. Manuel Arellano & Lars Peter Hansen & Enrique Sentana, 2009. "Underidentification? (Resumen)," Working Papers wp2009_0905, CEMFI.
    5. Hospido, Laura, 2015. "Wage dynamics in the presence of unobserved individual and job heterogeneity," Labour Economics, Elsevier, vol. 33(C), pages 81-93.
    6. Geert Dhaene & Koen Jochmans, 2015. "Split-panel Jackknife Estimation of Fixed-effect Models," Review of Economic Studies, Oxford University Press, pages 991-1030.
    7. Magnac, Thierry & Pistolesi, Nicolas & Roux, Sébastien, 2013. "Post schooling human capital investments and the life cycle variance of earnings," IDEI Working Papers 765, Institut d'Économie Industrielle (IDEI), Toulouse.
    8. Laura Hospido, 2009. "Job changes and individual-job specific wage dynamics," Working Papers 0907, Banco de España;Working Papers Homepage.
    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. Geert Dhaene & Koen Jochmans, 2011. "Profile-score Adjustements for Nonlinearfixed-effect Models," Working Papers hal-01073733, HAL.
    11. Joan Llull, 2008. "The Impact Of Immigration On Productivity," Working Papers wp2008_0802, CEMFI.
    12. 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.
    13. 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.
    14. Serrano, Roberto & Vohra, Rajiv, 2010. "Multiplicity of mixed equilibria in mechanisms: A unified approach to exact and approximate implementation," Journal of Mathematical Economics, Elsevier, vol. 46(5), pages 775-785, September.
    15. Andini, Corrado, 2014. "Persistence Bias and Schooling Returns," IZA Discussion Papers 8143, Institute for the Study of Labor (IZA).
    16. Manuel Arellano & Stéphane Bonhomme, 2009. "Robust Priors in Nonlinear Panel Data Models," Econometrica, Econometric Society, vol. 77(2), pages 489-536, 03.
    17. repec:spo:wpecon:info:hdl:2441/eu4vqp9ompqllr09j0031f620 is not listed on IDEAS
    18. Rafael Repullo & Jesús Saurina & Carlos Trucharte, 2010. "Mitigating the pro-cyclicality of Basel II," Economic Policy, CEPR;CES;MSH, pages 659-702.
    19. 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.

    More about this item


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

    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

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