Modeling Endogenous Mobility in Wage Determiniation

49 Pages Posted: 10 Jul 2015

See all articles by John M. Abowd

John M. Abowd

U.S. Census Bureau; Cornell University Department of Economics; Labor Dynamics Institute; School of Industrial and Labor Relations; NBER (on leave); CREST; IZA Institute of Labor Economics

Kevin L McKinney

University of California, Los Angeles (UCLA)

Ian M. Schmutte

University of Georgia - C. Herman and Mary Virginia Terry College of Business - Department of Economics

Date Written: July 1, 2015

Abstract

We evaluate the bias from endogenous job mobility in fixed-effects estimates of worker- and firm-specific earnings heterogeneity using longitudinally linked employer-employee data from the LEHD infrastructure file system of the U.S. Census Bureau. First, we propose two new residual diagnostic tests of the assumption that mobility is exogenous to unmodeled determinants of earnings. Both tests reject exogenous mobility. We relax the exogenous mobility assumptions by modeling the evolution of the matched data as an evolving bipartite graph using a Bayesian latent class framework. Our results suggest that endogenous mobility biases estimated firm effects toward zero. To assess validity, we match our estimates of the wage components to out-of-sample estimates of revenue per worker. The corrected estimates attribute much more of the variation in revenue per worker to variation in match quality and worker quality than the uncorrected estimates.

Keywords: Earnings heterogeneity, Mobility Bias, Latent Class Model, Markov Chain Monte Carlo

Suggested Citation

Abowd, John Maron and McKinney, Kevin L and Schmutte, Ian M., Modeling Endogenous Mobility in Wage Determiniation (July 1, 2015). US Census Bureau Center for Economic Studies Paper No. CES-WP-15-18. Available at SSRN: https://ssrn.com/abstract=2627186 or http://dx.doi.org/10.2139/ssrn.2627186

John Maron Abowd (Contact Author)

U.S. Census Bureau ( email )

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Kevin L McKinney

University of California, Los Angeles (UCLA) ( email )

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Ian M. Schmutte

University of Georgia - C. Herman and Mary Virginia Terry College of Business - Department of Economics ( email )

Athens, GA 30602-6254
United States

HOME PAGE: http://people.terry.uga.edu/schmutte/

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