Does the Labor-Income Process Contain a Unit Root? Evidence from Individual-Specific Time Series

Magnus Gustavsson and Pär Österholm

No 2010:19, Working Paper Series, Center for Labor Studies from Uppsala University, Department of Economics

Abstract: Employing econometric methods for univariate time series, this paper investigates the empirical validity of assuming a unit root in individuals’ labor-income processes. Using a Swedish register-based longitudinal dataset which allows us to follow a cohort of workers from 1968 to 2005, we are able to obtain distributions of median unbiased estimates of localto- unity parameters. The results indicate that earnings for the representative worker are governed by a process where shocks to earnings have fairly high persistence but are both economically and statistically significantly different from having permanent effects; that is, the largest autoregressive root is less than unity. These results add to the studies that question the heavy use of unit-root processes for earnings in calibrations of life-cycle models.

Keywords: Idiosyncratic income risk; Unit-root model; Earnings dynamics; Local-to-unity parameter (search for similar items in EconPapers)
JEL-codes: C22 C23 J31 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2010-12-09
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Does the labor-income process contain a unit root? Evidence from individual-specific time series (2014)
Working Paper: Does the Labor-Income Process Contain a Unit Root? Evidence from Individual-Specific Time Series (2010)
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