How Much Should we Trust Estimates of Firm Effects and Worker Sorting?

Stephane Bonhomme (1) , Kerstin Holzheu (2) , Thibaut Lamadon (1, 3, 4) , Elena Manresa (5) , Magne Mogstad (1, 3, 4) , Bradley Setzler (6)

1 University of Chicago
2 ECON - Département d'économie (Sciences Po)
3 NBER - National Bureau of Economic Research [New York]
4 IFS - Laboratory of the Institute for Fiscal Studies
5 NYU - New York University [New York]
6 Penn State - Pennsylvania State University

Many studies use matched employer-employee data to estimate a statistical model of earnings determination with worker and firm fixed effects. Estimates based on this model have produced influential yet controversial conclusions. The objective of this paper is to assess the sensitivity of these conclusions to the biases that arise because of limited mobility of workers across firms. We use employer-employee data from the US and several European countries while taking advantage of both fixed-effects and random-effects methods for biascorrection. We find that limited mobility bias is severe and that bias-correction is important.

Domains: Economics and Finance

Stephane Bonhomme, Kerstin Holzheu, Thibaut Lamadon, Elena Manresa, Magne Mogstad, et al.. How Much Should we Trust Estimates of Firm Effects and Worker Sorting?. Journal of Labor Economics, In press, ⟨10.1086/720009⟩. ⟨hal-03882713⟩