Do Firm Effects Drift? Evidence from Washington Administrative Data

Marta Lachowska, Alexandre Mas, Raffaele D. Saggio, Stephen A. Woodbury

NBER Working Paper No. 26653
Issued in January 2020
NBER Program(s):Labor Studies

We study the time-series properties of firm effects in the two-way fixed effects models 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-one-out methodology of Kline, Saggio and Sølvsten (2019) to correct for biases in the resulting variance components. Using administrative wage records from Washington State, we find, first, that firm effects for hourly wage rates and earnings are highly persistent. Specifically, the autocorrelation coefficient between firm effects in 2002 and 2014 is 0.74 for wages and 0.82 for earnings. Second, the R-AKM approach uncovers 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, we document an increase in wage dispersion between 2002–2003 and 2013–2014. This increase in wage dispersion is driven by increases in the variance of worker effects and sorting, with an accompanying decrease in the variance of firm wage effects. Auxiliary analyses suggest that the misspecification of standard AKM models resulting from restricting firm effects to be fixed over time is a second-order concern.

You may purchase this paper on-line in .pdf format from ($5) for electronic delivery.

Access to NBER Papers

You are eligible for a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.


Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w26653

NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us