GMM estimation of the covariance structure of longitudinal data on earnings

In this article, we discuss generalized method of moments estimation of the covariance structure of longitudinal data on earnings, and we introduce and illustrate a Stata program that facilitates the implementation of the generalized method of moments approach in this context. The program, gmmcovearn, estimates a variety of models that encompass those most commonly used by labor economists. These include models where the permanent component of earnings follows a random growth or random walk process and where the transitory component can follow either an AR(1) or an ARMA(1,1) process. In addition, time-factor loadings and cohort-factor loadings may be incorporated in the transitory and permanent components.