Earnings Dynamics Research Articles

Family, Community and Long-Term Earnings Inequality

Correlations between the earnings of siblings reflect shared family and community background, but evidence is mixed on the relative magnitudes of these influences. Using administrative data on the Danish population we link brothers, schoolmates and teenage neighbors and estimate a model of multiple group earnings dynamics to measure jointly the relative importance of family, neighborhoods and schools for long-term earnings. We find that: (1) family is by far the most relevant factor; (2) the influence of neighborhoods and schools falls rapidly, becoming insignificant by age 30; and (3) community effects are persistent and upward biased by a factor of five if family effects are ignored.

Earnings Instability and Tenure

AbstractWe study the effect of tenure on earnings instability in Italy using the reforms of temporary employment contracts, which affected the average tenure of workers differentially across cohorts. We develop a model of earnings dynamics, and we exploit the variation of tenure and instability over time and across birth cohorts to estimate policy‐relevant parameters. Our results indicate that each year of tenure on the job reduces earnings instability by 11 percent; the drop is faster in the first three years of the match. Workers on a temporary contract have an earnings instability up to 100 percent higher than workers on a permanent contract.

Earnings Dynamics, Foreign Workers and the Stability of Inequality Trends in Luxembourg 1988-2009

This paper exploits a large-scale administrative dataset to document trends in male earnings inequality in Luxembourg over twenty years of rapid economic growth. A detailed error components model is estimated to identify persistent and transitory components of log hourly earnings variance. Given the importance of foreign labour in Luxembourg, models and inequality trends are distinguished between native, immigrant and cross-border workers. Surprisingly, we observe only a modest increase in overall hourly earnings inequality between 1988 and 2009. This apparent stability is however the net result of somewhat more complex underlying changes, with marked increases in persistent inequality (except among native workers), growing contribution of foreign workers, divergence across subgroups, and a decrease in earnings instability (primarily for native workers). Overall, we interpret these results as showing a surprising stability in the face of the industrial re-development, the changes in the size and structure of employment, and the fast growth that characterized the country's economy in this period. Such results possibly hint at the role of strict labour market regulations and collective bargaining institutions in holding back earnings inequality, at least in a period of fast economic growth and soaring demand for labour.

What Do Data on Millions of U.S. Workers Reveal About Life-Cycle Earnings Risk?

We study the evolution of individual labor earnings over the life cycle, using a large panel data set of earnings histories drawn from U.S. administrative records. Using fully nonparametric methods, our analysis reaches two broad conclusions. First, earnings shocks display substantial deviations from lognormality — the standard assumption in the literature on incomplete markets. In particular, earnings shocks display strong negative skewness and extremely high kurtosis — as high as 30 compared with 3 for a Gaussian distribution. The high kurtosis implies that, in a given year, most individuals experience very small earnings shocks, and a small but non-negligible number experience very large shocks. Second, these statistical properties vary significantly both over the life cycle and with the earnings level of individuals. We also estimate impulse response functions of earnings shocks and find important asymmetries: Positive shocks to high-income individuals are quite transitory, whereas negative shocks are very persistent; the opposite is true for low-income individuals. Finally, we use these rich sets of moments to estimate econometric processes with increasing generality to capture these salient features of earnings dynamics.

The Dynamics of Earnings in Germany: Evidence from Social Security Records

We examine patterns of earnings volatility for male employees who are subject to statutory social security contributions in West Germany over the period 1986 - 2005. For this purpose, we analyse individual records covering highly reliable earnings biographies provided by the German Social Security Administration. We decompose earnings into permanent and transitory components and estimate parameters of the underlying variance-covariance structure of the earnings components model. This provides insights into the mechanics of earnings dynamics of the German labour market. We find evidence for increasing overall volatility which is predominantly driven by the permanent earnings component and therefore indicates increasing earnings inequality.

Analysis of the bias of Matching and Difference-in-Difference under alternative earnings and selection processes

Matching and Difference in Difference (DID) are two widespread methods that use pre-treatment outcomes to correct for selection bias. I detail the sources of bias of both estimators in a model of earnings dynamics and entry into a Job Training Program (JTP) and I assess their performances using Monte Carlo simulations of the model calibrated with realistic parameter values. I find that Matching generally underestimates the average causal effect of the program and gets closer to the true effect when conditioning on an increasing number of pre-treatment outcomes. When selection bias is symmetric around the treatment date, DID is consistent when implemented symmetrically—i.e. comparing outcomes observed the same number of periods before and after the treatment date. When selection bias is not symmetric, Monte Carlo simulations show that Symmetric DID still performs better than Matching, especially in the middle of the life-cycle. These results are consistent with estimates of the bias of Matching and DID from randomly assigned JTPs. Some of the virtues of Symmetric DID extend to programs other than JTPs allocated according to a cutoff eligibility rule.

Identity economics meets financialisation: gender, race and occupational stratification in the US labour market

Throughout his career Geoff Harcourt has constantly and consistently highlighted the role of social norms and collective decisions in his study of modern economies. In doing so he has put a great deal of emphasis on the distribution of income between different social groups, especially so when concerned with the labour market. This article attempts to celebrate this particular aspect of his numerous contributions to economics by highlighting the role of social norms in influencing earnings across occupations and demographic groups in the USA. Social norms generate hierarchy, economic and non-economic inequalities amongst ascriptively distinguished groups. Drawing on the stratification and identity economics literatures, this article proposes a novel theoretical and empirical framework for analysing the effects of financialisation on the earnings dynamics of gender and race groups, a framework that is consistent with discrimination as a source of racial and gender inequality. The empirical methodology used in the form of long-run cointegrating relationships of groups’ earnings across occupations assesses whether a pattern of social norms on wage distribution emerges over time. The results of this study show that over the past 30 years social norms have exacerbated the stratification of the US labour market.

Earnings Dynamics and Profile Heterogeneity: Estimates from Japanese Panel Data

The recent empirical work on earnings processes using US panel data finds that ignoring heterogeneity in earnings profiles among individuals leads to an upward bias in the autoregressive parameter of earnings shocks. It then argues that the existing assumptions in incomplete markets and heterogeneous-agent models, almost all of which require highly persistent earnings shocks and no individual-specific and group-specific differences in earnings growth rates, may be inappropriate. This paper investigates the applicability of this US data-based debate to other developed countries by using a panel of Japanese male earnings. The results indicate that it is possible to corroborate the recent US arguments, despite some differences in the estimates.

Winners and losers: South African labour-market dynamics between 2008 and 2010

There is little empirical work in South Africa using panel data to describe employment and earnings dynamics. This paper contributes by describing labour-market transitions in South Africa between 2008 and 2010 for individuals aged 20 to 55 across two waves of nationally representative panel data. We find that women had more mobility than men into and out of the labour market and employment. However, women were less mobile between kinds of employment and across occupations. Casual employment was very unstable, with very few individuals remaining in this state. In contrast, there was little mobility out of regular employment into other kinds of employment. Average real earnings changes were positive for movements into regular employment and negative for movements into self-employment or casual employment. Strong movement out of semi-skilled occupations was striking, especially for males. In multivariate models, being the mother of young children was important in leaving regular employment.

Winners and losers: South African labour-market dynamics between 2008 and 2010

There is little empirical work in South Africa using panel data to describe employment and earnings dynamics. This paper contributes by describing labour-market transitions in South Africa between 2008 and 2010 for individuals aged 20 to 55 across two waves of nationally representative panel data. We find that women had more mobility than men into and out of the labour market and employment. However, women were less mobile between kinds of employment and across occupations. Casual employment was very unstable, with very few individuals remaining in this state. In contrast, there was little mobility out of regular employment into other kinds of employment. Average real earnings changes were positive for movements into regular employment and negative for movements into self-employment or casual employment. Strong movement out of semi-skilled occupations was striking, especially for males. In multivariate models, being the mother of young children was important in leaving regular employment.

What Do Data on Millions of U.S. Workers Say About Life Cycle Income Risk?

This paper sheds new light on individual labor income risk using a unique and confidential dataset from the Social Security Administration on individuals' earnings histories. The substantial sample size allows us to cut the data in different and novel ways and document how earnings risk varies over the lifecycle and across individuals that differ in their lifetime income. The main conclusion of our research is that earnings risk varies significantly across the population in the following ways. First, the overall size of income risk becomes smaller with age, from age 25 to 50 and then increases again. Second, as individuals age, the likelihood of getting very small and very large shocks increases relative to the likelihood of middling shocks. Third, income shocks become more left skewed with age, meaning that, relative to the average change in income, a large fall becomes more likely than a large rise as individuals get older. Finally, earnings growth rates are dramatically different for individuals ranked by their lifetime income: individuals with lifetime earnings in the top 5% experience a growth rate from age 25 to 55 that is 10 times larger than individuals with average lifetime earnings. To provide useful input to policy relevant research, we estimate an econometric process that captures these salient features of earnings dynamics to provide a reliable “user's guide” for applied economists.

Technological Progress and the Earnings of Older Workers

Economists’ standard model assumes that improvements in total factor productivity (TFP) raise the marginal product of labor for all workers evenly. This paper uses an earnings dynamics regression model to study whether, in practice, older workers benefit less from TFP growth than younger workers. We utilize panel earnings data from the Social Security Administration’s Continuous Work History Sample. The data include workers of all ages, and we use annual figures for 1950-2004. Our first specification relies on BLS measurements of TFP. Our second model develops a new TFP measure using a principal components analysis. We find that although the earnings of younger workers track TFP growth 1-for-1, the earnings of older workers do not: we find, for example, that a 60-year-old male’s earnings grow only 85-90% as fast as TFP. Nevertheless, our analysis implies that in an economy with an aging labor force, gains from experience tend to outweigh older workers’ inability to benefit fully from TFP improvements.

Heterogeneity in the Dynamics of Labor Earnings

In this article, we survey the literature on individual earnings dynamics with a particular focus on allowing for pervasive heterogeneity across individuals. We structure the discussion around ARMA processes with nonlinear trends for each individual. We show that allowing for pervasive and codependent heterogeneity in individual parameters has a major impact on econometric modeling, estimation, and substantive conclusions. We describe an econometric method that is suitable for models with pervasive heterogeneity. We develop a long list of statistics that describe any earnings panel in great detail and provide a demanding set of features of the data for fitting. This list encompasses most moments used in the literature and provides novel statistics based on individual regressions. Finally, we present an empirical illustration using a long Danish panel. Based on this, we provide some conclusions concerning earnings dynamics but emphasize that details will vary according to the sample.

Earnings dynamics of men and women in Finland: permanent inequality versus earnings instability

I decompose the earnings variance of Finnish male and female workers into its permanent and transitory components using the approach of Baker (J Labor Econ,15:338–375, 1997) and Haider (J Labor Econ, 19:799–836, 2001) in the spirit of scientific replication. I find that the increasing earnings inequality of men and women is driven by both the transitory and permanent components of earnings. In addition, I find considerable differences in the earnings dynamics of men and women, that have been largely neglected in previous studies of earnings dynamics. The inequality among men is dominated by the permanent component. Conversely, permanent and transitory components are of comparable magnitudes to women. As a corollary, men experience more stable income paths but display larger permanent earnings differences. Women, on the other hand, face more unstable earnings profiles but show smaller permanent differences in earnings.

AN INTERNATIONAL COMPARISON OF LIFETIME INEQUALITY: HOW CONTINENTAL EUROPE RESEMBLES NORTH AMERICA

We compare earnings inequality and mobility across the United States, Canada, France, Germany and the United Kingdom during the late 1990s. A flexible model of earnings dynamics that isolates positional mobility within a stable earnings distribution is estimated. Earnings trajectories are then simulated, and lifetime annuity value distributions are constructed. Earnings mobility and employment risk are found to be positively correlated with base-year inequality. Taken together they produce more equalization in countries with high cross-section inequality such that the countries in our sample have more similar lifetime inequality levels than cross-section measures suggest.

On the persistence of income shocks over the life cycle: Evidence, theory, and implications

How does the persistence of earnings change over the life cycle? Do workers at different ages face the same variance of idiosyncratic earnings shocks? This paper proposes a novel specification for residual earnings that allows for an age profile in the persistence and variance of labor income shocks. We show that the statistical model is identified, and we estimate it using Panel Study of Income Dynamics data. We find that shocks to earnings are only moderately persistent (around 0.75) for young workers. Persistence rises with age, up to unity, until midway through life. The variance of persistent shocks exhibits a U-shaped profile over the life cycle (with a minimum of 0.01 and a maximum of 0.05). These results suggest that the standard specification in the literature (with age-invariant persistence and variance) cannot capture the earnings dynamics of young workers. We also argue that a calibrated job turnover model can account for these nonflat profiles. The key idea is that workers sort into better jobs and settle down as they age; in turn, magnitudes of wage growth rates decline, thereby decreasing the variance of shocks. Furthermore, the decline in job mobility results in higher persistence. Finally, we investigate the implications of age profiles for consumption–savings behavior. The welfare cost of idiosyncratic risk implied by the age-dependent income process is up to 1.6 percent of lifetime consumption lower compared with its age-invariant counterpart. This difference is mostly due to a higher degree of consumption insurance for young workers, for whom persistence is moderate. These results suggest that age profiles of persistence and variances should be taken into account when calibrating life-cycle models.

The correlation of spouses' permanent and transitory earnings and family earnings inequality in Canada

I develop a very flexible error-component model of family earnings dynamics to examine recent Canadian trends in the variance of family earnings and its components using the ‘permanent-transitory’ analytical framework. In contrast to most studies of family earnings inequality, the main focus of this paper is on the trends in the correlation between spouses' permanent and transitory earnings. I find strong evidence of an increase in the correlation of spouses' permanent earnings before 1993 and no evidence of such an increase after 1993. However, the correlation of spouses' transitory earnings steadily increased throughout the 1990s and well into the 2000s.

Job-to-Job Flows in the Great Recession

We develop prototype job-to-job flow measures to provide new evidence on labor turnover and earnings dynamics in the Great Recession. We find a sharp drop in job mobility in the Great Recession, much sharper than the previous recession, and higher earnings penalties for job transitions with an intervening nonemployment spell. Focusing on residential construction separators in particular, we find increasing rates of industry change and higher earnings penalties from job change in the Great Recession.

Effet de la dynamique des revenus professionnels des conjoints sur la dynamique matrimoniale au Luxembourg

Résumé Cet article porte sur l’effet des revenus du travail sur la stabilité conjugale. Partant des données du panel luxembourgeois collectées dans les années 1980-1990, nous essayons d’appréhender l’impact des revenus de chaque conjoint et l’impact des variations de revenu au cours du temps sur le risque de rupture d’union (mariage et union libre). Les résultats mettent en évidence une asymétrie de l’impact des dynamiques de revenu selon le genre : quand les revenus varient en faveur des femmes, le risque de rupture s’accroît tandis que, lorsque les revenus d’activité des hommes augmentent, on observe le phénomène inverse. Ces résultats ne sont pas spécifiques au Luxembourg, mais ont également été mis en évidence dans plusieurs pays européens.

Dynamically Sabotage-Proof Tournaments

This paper examines a two-period tournament where agents may possibly engage in destructive sabotage activities. Under plausible circumstances, sabotage proves to be an effective tool for low-ability agents, especially when they are faced with high-ability opponents. The possibility of sabotage then gives rise to a dynamic concern, similar to the Ratchet effect, because an agent runs a risk of becoming the target of sabotage by signaling his high ability in early stages. In this dynamic setting, we first establish an impossibility result where the mere possibility of sabotage makes it impossible to implement the first-best effort due to this dynamic concern. Given this result, we then offer two distinct incentive schemes, fast track and late selection, to circumvent this problem. The fast-track scheme is likely to prevail when the production process values diversity in inputs (submodular technologies) while the late-selection scheme is to prevail when it values homogeneity (supermodular technologies). The present model offers a mechanism through which both fast track and late selection arise in a unified framework, yielding testable implications for differences in promotion patterns, earnings dynamics and earnings dispersion.