Turbulence, Heterogeneity and Earnings Inequality

Abstract

This paper argues that there is a close connection between the increase in earnings losses following separations that occurred in the United States from the 1970s to the 1980s and the increase in earnings dispersion that occurred during the same time both between, as well as within, educational groups. A dynamic human capital accumulation model parameterized to match some selected moments of the U.S. labor market, as well as the observed increase in earnings losses following separations, can account for the increase in the college premium, as well as for the bulk of the increases in the variances of both permanent and transitory earnings of the different educational groups.