Modelling heterogeneity and dynamics in the volatility of individual wages

Laura Hospido

No 738, Working Papers from Banco de España

Abstract: In this paper I consider a model for the heterogeneity and dynamics of the conditional mean and the conditional variance of standarized individual wages. In particular, I propose a dynamic panel data model with individual effects both in the mean and in a conditional ARCH type variance function. I posit a distribution for earning shocks and I build a modified likelihood function for estimation and inference in a fixed-T context. Using a newly developed bias-corrected likelihood approach makes it possible to reduce the estimation bias to a term of order 1 over T squared. The small sample performance of bias corrected estimators 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 PSID. The empirical analysis is conducted on data drawn from the 1968-1993 PSID. I find that it is important to account for individual unobserved heterogeneity and dynamics in the variance, and that the latter is driven by job mobility. I also find that the model explains the non-normality observed in logwage data.

Keywords: Panel data; dynamic nonlinear models; conditional heteroskedasticity; fixed effects; bias reduction; individual wages (search for similar items in EconPapers)
JEL-codes: C23 J31 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2007-12
New Economics Papers: this item is included in nep-ecm and nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Related works:
Journal Article: Modelling heterogeneity and dynamics in the volatility of individual wages (2012)
Working Paper: Modelling Heterogeneity and Dynamics in the Volatility of Individual Wages (2010)
Working Paper: Modelling Heterogeneity and Dynamics in the Volatility of Individual Wages (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:0738

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