Working Paper: NBER ID: w14743
Authors: Joseph G. Altonji; Anthony Smith; Ivan Vidangos
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; Labor Economics; Unemployment; Human Capital
JEL Codes: D31; E21; J3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Human capital (J24) | Earnings growth (O49) |
| Job seniority (M51) | Earnings growth (O49) |
| Job mobility (J62) | Earnings growth (O49) |
| Unemployment shocks (J64) | Earnings (J31) |
| Unemployment at survey date (J64) | Annual earnings (J31) |
| Decreased work hours (J22) | Annual earnings (J31) |
| Decline in log hourly wage rate (J39) | Annual earnings (J31) |
| Job-specific wage shocks (J31) | Earnings (J31) |
| Job-specific hours shocks (J29) | Earnings (J31) |
| Education (I29) | Variance in lifetime earnings (J31) |
| Unobserved permanent heterogeneity (J69) | Variance in earnings (J31) |
| Unobserved permanent heterogeneity (J69) | Variance in hours (C29) |