MODELING EARNINGS DYNAMICS

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. 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...

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Bibliographic Details
Published in:Econometrica 2013-07, Vol.81 (4), p.1395-1454
Main Authors: Altonji, Joseph G., Smith, Anthony A., Vidangos, Ivan
Format: Article
Language:English
Subjects:
Career development
Careers
Coefficients
Earnings
Econometric models
Economic models
Employment
Hours of work
Human capital
indirect inference
inequality
Job change
job mobility
Labor economics
Modeling
Parametric models
Simulations
Standard error
Statistical variance
Studies
Unemployment
Wage growth
Wage rates
Wages
Wages & salaries
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Summary: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. 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 also study 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 as a substantial 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 of wages and hours.
ISSN:0012-9682
1468-0262
DOI:10.3982/ECTA8415