Subjective Earnings and Employment Dynamics

Manuel Arellano, Orazio Attanasio, Margherita Borella, Mariacristina De Nardi and Gonzalo Paz-Pardo
Additional contact information
Manuel Arellano: CEMFI
Orazio Attanasio: Yale University
Margherita Borella: University of Turin
Mariacristina De Nardi: University of Minnesota
Gonzalo Paz-Pardo: European Central Bank

No 2509, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: We develop a new approach to estimating earnings, job, and employment dynamics using subjective expectations data from the NY Fed Survey of Consumer Expectations. These data provide beliefs about future earnings offers and acceptance probabilities, offering direct information on counterfactual outcomes and enabling identification under weaker assumptions. Our framework avoids biases from selection and unobserved heterogeneity that affect models using realized outcomes. First-step fixed-effects regressions identify risk, persistence, and transition effects; second-step GMM recovers the covariance structure of unobserved heterogeneities such as ability, mobility, and match quality. We find lower risk and persistence of the individual productivity component than in prior work, but greater heterogeneity in ability and match quality. Simulations show that reduced-form estimates overstate persistence and volatility on individual-level productivity due to job transitions and sorting. After accounting for heterogeneity, volatility declines and becomes flat across the earnings distribution. These results underscore the value of expectations data.

Pages: 70 pages
Date: 2026-03-01
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