The persistence of wages

Anabela Carneiro, Pedro Portugal (), Pedro Raposo and Paulo Rodrigues

Journal of Econometrics, 2023, vol. 233, issue 2, 596-611

Abstract: This paper documents the extent to which wage persistence can be explained by permanent worker, employer, and match heterogeneity. Standard methods used to perform such decompositions for industry or racial wage gaps are inappropriate for decomposing wage persistence in dynamic panel data models because of the incidental parameter problem. When we apply these methods without bias correction, we find that the majority, 59.3 percent, of wage persistence is explained by worker heterogeneity, with employer and match heterogeneity explaining 29.7 and 11.0 percent, respectively. We evaluate three methods for addressing incidental parameter bias using a Monte Carlo study. An empirical application to Portuguese linked employer–employee data shows that the uncorrected estimates tend to understate wage persistence by around 24 to 42 percent, depending on the choice of the bias correction estimator used, and overstate the extent to which wage persistence arises from permanent unobserved heterogeneity. Furthermore, results indicate that the uncorrected estimates overstate the role of permanent worker heterogeneity, and understate the role of firm heterogeneity.

Keywords: Wage persistence; High-dimensional fixed effects; Match effects; Incidental parameter problem (search for similar items in EconPapers)
JEL-codes: E24 J31 J63 J65 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: The Persistence of Wages (2021)
Working Paper: The persistence of wages (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:233:y:2023:i:2:p:596-611

DOI: 10.1016/j.jeconom.2021.11.014

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