Department of Economics
1280 Main Street West
NBER Working Papers and Publications
|January 2018||Wage Dynamics and Returns to Unobserved Skill|
with Lance Lochner, Youngmin Park: w24220
Economists disagree about the factors driving the substantial increase in residual wage inequality in the U.S. over the past few decades. We identify and estimate a general model of log wage residuals that incorporates: (i) changing returns to unobserved skills, (ii) a changing distribution of unobserved skills, and (iii) changing volatility in wages due to factors unrelated to skills. Using data from the PSID, we estimate that the returns to unobserved skills have declined by as much as 50% since the mid-1980s despite a sizable increase in residual inequality. Instead, the variance of skills rose over this period due to increasing variability in life cycle skill growth. Finally, we develop an assignment model of the labor market and show that both demand and supply factors contributed t...
|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...