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Minu, Startu and All That: Pitfalls in Estimating the Sensitivity of a Worker's Wage to Aggregate Unemployment

  • Martins, Pedro S.

    ()

    (Queen Mary, University of London)

  • Snell, Andy

    ()

    (University of Edinburgh)

  • Thomas, Jonathan P.

    ()

    (University of Edinburgh)

In this paper we show that panel estimates of tenure specific sensitivity to the business cycle of wages is subject to serious pitfalls. 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 (δu) – 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. Our proposed solution method is however suboptimal because it removes a lot of potentially informative variation in average wages. Unfortunately δu 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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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5503.

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Length: 42 pages
Date of creation: Feb 2011
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Handle: RePEc:iza:izadps:dp5503
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  1. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis and the European Unemployment Problem," NBER Working Papers 1950, National Bureau of Economic Research, Inc.
  2. Gertler, Mark & Trigari, Antonella, 2006. "Unemployment fluctuation with staggered Nash wage bargaining," CFS Working Paper Series 2007/09, Center for Financial Studies (CFS).
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  9. 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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  13. 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.
  14. Beaudry, Paul & DiNardo, John, 1991. "The Effect of Implicit Contracts on the Movement of Wages over the Business Cycle: Evidence from Micro Data," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 665-88, August.
  15. Juha Kilponen & Torsten Santavirta, 2010. "New Evidence on Implicit Contracts from Linked Employer-Employee Data," Scandinavian Journal of Economics, Wiley Blackwell, vol. 112(4), pages 864-883, December.
  16. Marcello Estevao & Beth Anne Wilson, 1998. "Nominal wage rigidity and real wage cyclicality," Finance and Economics Discussion Series 1998-21, Board of Governors of the Federal Reserve System (U.S.).
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