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Does the Labor-Income Process Contain a Unit Root? Evidence from Individual-Specific Time Series
Nationalekonomiska institutionen, Uppsala universitet.
Konjunkturinstitutet.ORCID iD: 0000-0002-4840-7649
2014 (English)In: Journal of Economic Dynamics and Control, ISSN 0165-1889, E-ISSN 1879-1743, Vol. 47, 152-167 p.Article in journal (Refereed) Published
Place, publisher, year, edition, pages
2014. Vol. 47, 152-167 p.
Keyword [en]
Income risk, Earnings dynamics, Median-unbiased estimation
National Category
Economics
Research subject
Economics
Identifiers
URN: urn:nbn:se:oru:diva-58292OAI: oai:DiVA.org:oru-58292DiVA: diva2:1115485
Note

Calibrations of models related to life-cycle behavior of consumption and saving often invoke the important assumption of a unit root in individuals' labor-income process. We for the first time test this assumption using methods for univariate time series. Based on longitudinal register data from 1968 to 2005, we first estimate an autoregressive model for each individual using a method for approximately median-unbiased estimation. We then exploit the resulting distribution of the individual-specific estimates to draw inference about the presence of a unit root. Results indicate that earnings for the representative worker are governed by a process where shocks to earnings have moderate persistence and are both economically and statistically significantly different from having permanent effects. These results question the heavy use of unit-root processes for earnings.

Available from: 2017-06-26 Created: 2017-06-26 Last updated: 2017-06-28

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Österholm, Pär
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