Modeling Earnings Dynamics

74 Pages Posted: 3 Apr 2009

See all articles by Joseph G. Altonji

Joseph G. Altonji

Yale University - Economic Growth Center; National Bureau of Economic Research (NBER); Yale University - Cowles Foundation

Anthony A. Smith

Yale University - Cowles Foundation

Ivan Vidangos

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: February , 2009

Abstract

In this paper we use indirect inference to estimate a joint model of earnings, employment, job changes, wage rates, and work hours over a career. Our model incorporates duration dependence in several variables, multiple sources of unobserved heterogeneity, job-specific error components in both wages and hours, and measurement error. We use the model to address a number of important questions in labor economics, including the source of the experience profile of wages, the response of job changes to outside wage offers, and the effects of seniority on job changes. We provide estimates of the dynamic response of wage rates, hours, and earnings to various shocks and measure the relative contributions of the shocks to the variance of earnings in a given year and over a lifetime. We find that human capital accounts for most of the growth of earnings over a career although job seniority and job mobility also play significant roles. Unemployment shocks have a large impact on earnings in the short run as well a substantial long long-term effect that operates through the wage rate. Shocks associated with job changes and unemployment make a large contribution to the variance of career earnings and operate mostly through the job-specific error components in wages and hours.

Keywords: Earnings dynamics, income shocks, wage growth, job mobility, indirect inference

JEL Classification: E3

Suggested Citation

Altonji, Joseph G. and Smith, Anthony A. and Vidangos, Ivan, Modeling Earnings Dynamics (February , 2009). FEDS Working Paper No. 2009-08, Available at SSRN: https://ssrn.com/abstract=1370513 or http://dx.doi.org/10.2139/ssrn.1370513

Joseph G. Altonji

Yale University - Economic Growth Center ( email )

Box 208269
New Haven, CT 06520-8269
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

Anthony A. Smith

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States

Ivan Vidangos (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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