Department of Economics, Social Sciences Centre
1151 Richmond St. N
London, ON N6A 5C2
NBER Working Papers and Publications
|April 2014||Understanding Earnings Dynamics: Identifying and Estimating the Changing Roles of Unobserved Ability, Permanent and Transitory Shocks|
with Lance Lochner: w20068
We consider a general framework to study the evolution of wage and earnings residuals that incorporates features highlighted by two influential but distinct literatures in economics: (i) unobserved skills with changing non-linear pricing functions and (ii) idiosyncratic shocks with both permanent and transitory components.
We first provide nonparametric identification conditions for the distribution of unobserved skills, all unobserved skill pricing functions, and (nearly) all distributions for both permanent and MA(q) transitory shocks. We then discuss identification and estimation using a moment-based approach, restricting unobserved skill pricing functions to be polynomials. Using data on log earnings for men ages 30-59 in the PSID, we estimate the evolution of unobserved skill pric...