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Does the labor-income process contain a unit root? Evidence from individual-specific time series

Magnus Gustavsson () and Pär Österholm ()

Journal of Economic Dynamics and Control, 2014, vol. 47, issue C, 152-167

Abstract: Calibrations of models related to life-cycle behavior of consumption and saving often invoke the important assumption of a unit root in individuals׳ labor-income process. We for the first time test this assumption using methods for univariate time series. Based on longitudinal register data from 1968 to 2005, we first estimate an autoregressive model for each individual using a method for approximately median-unbiased estimation. We then exploit the resulting distribution of the individual-specific estimates to draw inference about the presence of a unit root. Results indicate that earnings for the representative worker are governed by a process where shocks to earnings have moderate persistence and are both economically and statistically significantly different from having permanent effects. These results question the heavy use of unit-root processes for earnings.

Keywords: Income risk; Earnings dynamics; Median-unbiased estimation (search for similar items in EconPapers)
JEL-codes: C22 C23 J31 (search for similar items in EconPapers)
Date: 2014
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Related works:
Working Paper: Does the Labor-Income Process Contain a Unit Root? Evidence from Individual-Specific Time Series (2010) Downloads
Working Paper: Does the Labor-Income Process Contain a Unit Root? Evidence from Individual-Specific Time Series (2010) Downloads
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