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Y9 Model Legibility With the information provided, explain as much about the following model as possible. 3.2 Firm Pay Shocks as Instrument for Labor Income

Y9

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Model Legibility With the information provided, explain as much about the following model as possible. 3.2 Firm Pay Shocks as Instrument for Labor Income To measure the causal effect of typical income variation on consumption, we use variation in firm-level pay. This strategy avoids the contamination from labor supply discussed above. It is inspired by the labor economies model of firm effects ploncered by Abowd, Kramarz and Margolis (henceforth AKM, 1999) and more recently by a research design used in Koustas (2018). Consider the data-generating process the = art Pillow + The (3) where cr, is an individual effect, J(i, t) is worker i's firm in month , vyn, is the firm effect at time t, and me is an idiosyncratic Individual shock. Equation (3) follows Lachowska et al. (2023) in generalizing AKM to allow for time-varying firm effects (june), while most of the AKM literature assumes time-incariand firm effects (byrn).15

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