Earnings and Employment Dynamics: Capturing Cyclicality using Mixed Frequency Data

In this paper, we present a model of earnings dynamics that includes transitions in and out of employment as well as business cycle fluctuations. The model is estimated using the method of indirect inference and a mix of Swedish register, survey, and macro data. We find that the business cycle has a larger effect on transitions from unemployment to employment than on the risk of becoming unemployed. By simulating data from the model, we find that the business cycle has a relatively small impact on earnings inequality in Sweden and that women’s labor market outcomes are less sensitive to business cycle fluctuations compared to men’s. Finally, we find that economic crises have a more severe impact on young workers.