Labor Market Entry and Earnings Dynamics: Bayesian Inference Using Mixtures-of-Experts Markov Chain Clustering

This paper analyzes patterns in the earnings development of young labor market en- trants over their life cycle. We identify four distinctly di®erent types of transition patterns between discrete earnings states in a large administrative data set. Further, we investigate the e®ects of labor market conditions at the time of entry on the probability of belonging to each transition type. To estimate our statistical model we use a model-based clustering approach. The statistical challenge in our application comes from the di±culty in extending distance-based clustering approaches to the problem of identify groups of similar time series in a panel of discrete-valued time series. We use Markov chain clustering, proposed by Pam- minger and FrÄuhwirth-Schnatter (2010), which is an approach for clustering discrete-valued time series obtained by observing a categorical variable with several states. This method is based on ¯nite mixtures of ¯rst-order time-homogeneous Markov chain models. In order to analyze group membership we present an extension to this approach by formulating a prob- abilistic model for the latent group indicators within the Bayesian classi¯cation rule using a multinomial logit model.