NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Moira Daly

Department of Economics
Centre for Economic and Business Research
Copenhagen Business School
Porcelaenshaven 16A, 2000
Frederiksberg
Denmark

E-Mail: moda.eco@cbs.dk
Institutional Affiliation: Copenhagen Business School

NBER Working Papers and Publications

December 2016Improving the Measurement of Earnings Dynamics
with Dmytro Hryshko, Iourii Manovskii: w22938
The stochastic process for earnings is the key element of incomplete markets models in modern quantitative macroeconomics. We show that a simple modification of the canonical process used in the literature leads to a dramatic improvement in the measurement of earnings dynamics in administrative and survey data alike. Empirically, earnings at the start or end of earnings spells are lower and more volatile than the observations in the interior of earnings histories, reflecting the effects of working less than the full year as well as deviations of wages due to e.g. tenure effects. Ignoring these properties of earnings, as is standard in the literature, leads to a substantial mismeasurement of the variances of permanent and transitory shocks and induces the large and widely documented diverge...
 
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