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A Users' Guide to Uncovering Worker and Firm Effects: The ABC of AKM

Stephane Bonhomme, Elena Manresa, Thibaut Lamadon

Abstract

The AKM model introduced by Abowd, Kramarz and Margolis (1999) has become a workhorse to study worker and firm heterogeneity, and to understand the sources of wage dispersion in the labor market using linked employer-employee data. In this article, we introduce the model and estimator, discuss some best practices for estimation, and review some empirical findings on the role of worker and firm heterogeneity in wage dispersion. While the AKM methodology has proven useful to analyze a host of questions in a variety of settings within labor economics and beyond, we also point to the need for methodological developments.

A Users' Guide to Uncovering Worker and Firm Effects: The ABC of AKM

Abstract

The AKM model introduced by Abowd, Kramarz and Margolis (1999) has become a workhorse to study worker and firm heterogeneity, and to understand the sources of wage dispersion in the labor market using linked employer-employee data. In this article, we introduce the model and estimator, discuss some best practices for estimation, and review some empirical findings on the role of worker and firm heterogeneity in wage dispersion. While the AKM methodology has proven useful to analyze a host of questions in a variety of settings within labor economics and beyond, we also point to the need for methodological developments.
Paper Structure (6 sections, 2 equations, 5 figures)

This paper contains 6 sections, 2 equations, 5 figures.

Figures (5)

  • Figure 1: Wages over time in the AKM model
  • Figure 2: Decomposition of the variance of log annual earnings in the US
  • Figure 3: Change in the decomposition of the variance of log daily wages over time in Germany
  • Figure 4: Sub-sampling experiment (German data)
  • Figure 5: Impact of bias correction on variance components