Subjective Earnings and Employment Dynamics

Manuel Arellano, Orazio Attanasio, Margherita Borella, Mariacristina De Nardi and Gonzalo Paz-Pardo

No 126, Opportunity and Inclusive Growth Institute Working Papers from Federal Reserve Bank of Minneapolis

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.

Keywords: Subjective expectations; Earnings dynamics models (search for similar items in EconPapers)
JEL-codes: C23 C81 D15 (search for similar items in EconPapers)
Date: 2026-04-07
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Related works:
Working Paper: Subjective Earnings and Employment Dynamics (2026)
Working Paper: Subjective Earnings and Employment Dynamics (2026)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmoi:103004

DOI: 10.21034/iwp.126

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