Do Firm Effects Drift? Evidence from Washington Administrative Data
We study the time-series properties of firm effects in the two-way fixed effects model popularized by Abowd, Kramarz, and Margolis (1999) (AKM) using two approaches. The first—the rolling AKM approach (R-AKM)—estimates AKM models separately for successive two-year intervals. The second—the time-varying AKM approach (TV-AKM)—is an extension of the original AKM model that allows for unrestricted interactions of year and firm indicators. We apply to both approaches the leave-out methodology of Kline, Saggio and Sølvsten (2020) to correct for biases in the estimated variance components. Using administrative wage records from Washington State, we find, first, that firm effects for hourly wage rates are highly persistent with an autocorrelation coefficient between firm effects in 2002 and 2014 of 0.74. Second, the R-AKM approach reveals cyclicality in firm effects and worker-firm sorting. During the Great Recession the variability in firm effects increased, while the degree of worker-firm sorting decreased. Third, misspecification of standard AKM models resulting from restricting firm effects to be fixed over time appears to be minimal.
We thank David Card, Patrick Kline, Christian Moser, Martha Stinson, Mikkel Sølvsten, Ian Schmutte, Jenna Stearns and Lars Vilhuber for helpful comments. We are grateful to the Employment Security Department (ESD) of Washington State for allowing access to the Washington wage records, and especially to Jeff Robinson of ESD, whose help was essential to understanding the data. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Marta Lachowska & Alexandre Mas & Raffaele Saggio & Stephen A. Woodbury, 2022. "Do firm effects drift? Evidence from Washington administrative data," Journal of Econometrics, .