GEE Estimation of a Two-Equation Panel Data Model: An Analysis of Wage Dynamics and the Incidence of Profit-Sharing in West Germany

Abstract

We propose a generalized estimating equations approach to the analysis of the mean and the covariance structure of a bivariate time series process of panel data with mixed continuous and discrete dependent variables. The approach is used to jointly analyze wage dynamics and the incidence of profit-sharing in West Germany. Our findings reveal a significantly positive conditional correlation of wages and the incidence of profit-sharing. Furthermore, they indicate that permanent unobserved individual ability is comparatively more important in the profit-sharing than in the wage equation and show that shocks have a long-lasting effect on transitory wages but not on the incidence of profit-sharing. Hence, the results support theoretical predictions that selection into profit-sharing is mostly due to unobservable ability and that profit-sharing ties wages more closely to productivity.