Abstract
Why does wage inequality rise with age? Using panel data on male wages, we explore the relative importance of unobserved worker heterogeneity versus random wage shocks in explaining this life‐cycle trend in Australia. While we find significant heterogeneity in wage levels (via differences in starting wages), we find no evidence of systematic heterogeneity in wage growth. Instead, highly persistent wage shocks are found to account entirely for the rise in wage inequality with age. We also find evidence that the upward trend in wage inequality since the early 2000s reflects an increase in permanent rather than transitory wage inequality.
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