Do Firm Effects Drift? Evidence from Washington Administrative Data

Marta Lachowska, Alexandre Mas, Raffaele Saggio () and Stephen Woodbury

No 26653, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the time-series properties of firm effects in the two-way fixed effects model popularized by Abowd, Kramarz, and Margolis (1999) (AKM) using two approaches. The first—the rolling AKM approach (R-AKM)—estimates AKM models separately for successive two-year intervals. The second—the time-varying AKM approach (TV-AKM)—is an extension of the original AKM model that allows for unrestricted interactions of year and firm indicators. We apply to both approaches the leave-out methodology of Kline, Saggio and Sølvsten (2020) to correct for biases in the estimated variance components. Using administrative wage records from Washington State, we find, first, that firm effects for hourly wage rates are highly persistent with an autocorrelation coefficient between firm effects in 2002 and 2014 of 0.74. Second, the R-AKM approach reveals cyclicality in firm effects and worker-firm sorting. During the Great Recession the variability in firm effects increased, while the degree of worker-firm sorting decreased. Third, misspecification of standard AKM models resulting from restricting firm effects to be fixed over time appears to be minimal.

JEL-codes: J0 J3 (search for similar items in EconPapers)
Date: 2020-01
New Economics Papers: this item is included in nep-lma
Note: LS
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Citations: View citations in EconPapers (22)

Published as Marta Lachowska & Alexandre Mas & Raffaele Saggio & Stephen A. Woodbury, 2022. "Do firm effects drift? Evidence from Washington administrative data," Journal of Econometrics, .

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Journal Article: Do firm effects drift? Evidence from Washington administrative data (2023)
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