Earnings Profiles Research Articles

Do decoupled payments affect investment financing constraints? Evidence from Irish agriculture

This paper empirically tests whether decoupled subsidies decrease investment financing constraints faced by farms. Using a panel dataset from Ireland over the period 2005–2010, we test whether the CAP decoupled subsidy payments reduce credit constraints by altering the risk profile of farm earnings. We test for financing constraints in a neoclassical Q model using investment-cash flow sensitivities. Our econometric methodology controls for censoring, heterogeneity and endogeneity. We find that decoupled subsidies do reduce credit constraints. The effect is greater for farms that face higher constraints: dairy farmers and younger farms. This evidence suggests that, over and above the effect on production indicated in previous research, decoupling affects farm investment through financial channels.

Post-War Trends in Labor Income in the Social Security Earnings Records

The Earnings Public-Use File (EPUF) contains complete information on annual Social Security-covered earnings for a sample of 3.13 million Americans who had earnings in at least one year between 1951 and 2006. The panel data are used to examine patterns and trends in lifetime earnings. The EPUF data show the increasing convergence of female and male lifetime earnings patterns across a number of dimensions: (1) the shape and level of the average age-earnings profile; (2) the age at first entry into covered employment; and (3) the age of labor force exit. The full lifetime earnings profiles for birth cohorts that entered work after 1951 and exited before 2006 reveal associations between workers’ ages of labor force entry and exit and the peak earnings they attain during their careers. We find that workers who enter employment at older ages and exit at earlier ages on average earn lower incomes in their 40s than those who enter employment earlier and exit later. Among men born between 1941 and 1945, those who began working between ages 20 and 22 earned about one-fifth less when they were in their 40s compared with men who had their first covered earnings when they were 15. The EPUF data show a clear and strong positive association between workers’ age of exit from covered employment and their earnings in mid-career. Workers who retire later, up through about age 62, tend to earn higher incomes during their 40s than workers who retire closer to age 50. For each birth cohort we examine and for both sexes, we find that workers who have a high level of earnings in years when they are employed also tend to have the longest careers. We also report the average and net return that successive cohorts of workers obtain on their Social Security contributions.

What Happens to the Employees When a Business Closes?

A national recession began in December 2007 and ended in June 2009. In this report we describe what happened after employees involuntarily lost their jobs because Maryland businesses closed between January 2004 and June 2009 — including both pre-recession and recession closures. This focus avoids many interpretive pitfalls about employee and employer motives, options and decisions.Four questions are answered here about impacts of the recent recession on employees that lost a job because of a business closure in Maryland: Were job losers during the recession less likely than their pre-recession counterparts to reappear as an employee of a Maryland business following the involuntary end of their former business affiliation? For those who did reappear, did it take longer for those that lost a job during the recession to return to work than the time taken for their pre-recession counterparts to return to work? Were those that lost a job after the recession began, and then reappeared, more likely than their pre-recession counterparts to now be affiliated with an employer in a different industry? What are the comparative pre-post earnings profiles for those losing their previous job because of a business closure during the recession or pre-recession time spans?The policy relevance of our findings is enhanced by the comparison of business closure consequences during the recession and pre-recession years. We seek to learn practical lessons for future actions from what happened in Maryland during these different phases of the most recent business cycle.We begin in the next section by describing the data used, the interpretive challenges faced and how we responded to these challenges. Findings are presented in a third section, and policy relevancy implications follow in a concluding section.

Human Capital and the Wealth of Nations†.

We reevaluate the role of human capital in determining the wealth of nations. We use standard human capital theory to estimate stocks of human capital and allow the quality of human capital to vary across countries. Our model can explain differences in schooling and earnings profiles and, consequently, estimates of Mincerian rates of return across countries. We find that effective human capital per worker varies substantially across countries. Cross-country differences in Total Factor Productivity (TFP) are significantly smaller than found in previous studies. Our model implies that output per worker is highly responsive to changes in TFP and demographic variables.

My Friends, My Network, My Job

Social networks have a profound impact on individual labor market outcomes. This paper establishes a theoretical framework where firms, workers, and applicants are linked through a social network of friendships and family links, which can be used by firms to reduce information asymmetries and increase match quality during the recruitment process. Here, the bayesian signaling game focuses on the decision of the worker, who is employed inside the firm and has links with the applicant outside the firm; the model proposes a set of equilibria where firms are able to generate matches with increased match quality through a social network. The theoretical framework pays special attention to potential incentive problems that arise due to nepotism and favoritism. The empirical model brings these predictions to the data and focuses on labor market outcomes at the individual level. The analysis exploits the panel dimension of the German Socio Economic Panel and highlights differences in labor market outcomes that can be linked to the existence of the aforementioned social networks. Empirical results focus on three key issues: First, findings allow for further insight on the determinants of the event I found my last job using either friends or relatives. Second, the paper evaluates the relationship between the use of a social networks and the starting wage of applicants. Third, results shed light on the question of how far long term labor market outcomes such as the duration of the job and the earnings profile differ by the entry channel into a job. Findings illustrate fluctuations in the use of social networks over the business cycle which highlight the decision making process of the worker who acts an an intermediary between the firm and the applicant. More specifically, the higher level of the unemployment rate reduces the probability to find a job through a social network. Additionally, results from the empirical model suggest that social networks improve match quality, resulting in longer employment spells and higher starting wages.

Occupational sorting of school graduates: The role of economic preferences

We relate risk attitudes and patience of young graduates from high-school, college and university, measured around the time that they start their labor market career in a large representative survey, to the riskiness and timing of earnings in the occupations they choose to work in. We find a systematic positive and significant relation between willingness to take risks and measures of occupational earnings risks and employment risk that we derive from a large administrative data set. Patient individuals are significantly more likely to choose for occupations with a steep earnings profile. Individuals whose economic preferences are not well aligned with the riskiness and timing of earnings in their initial occupation are more likely to change to an occupation that better matches their economic preferences.

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.

Asymmetric Information and IPO Size

We build a model of an IPO for firms with private information about their earnings profile over time and test the model’s predictions using a complete sample of newly listed Chinese companies between 1992 and 2007. The model predicts that IPO size is positively correlated with short-term operating performance that is not directly consistent with traditional theories. It also provides an explanation for negative correlation between debt and profitability that is not consistent with standard trade-off theory or signaling theory. The empirical results provide strong support for our model.

Selective Outmigration and the Estimation of Immigrants' Earning Profiles

This chapter begins by documenting that temporary migrations are not only very common, but that outmigration of immigrants is selective both in terms of migrants’ individual characteristics and their economic outcomes. We then examine the problems that arise when estimating immigrants’ earnings profiles when outmigration is selective, and discuss the identifying assumptions needed to answer three different questions on immigrants’ earnings careers. We show how better data can help to relax these assumptions, suggest appropriate estimators, and provide an illustration using simulated data. We finally provide an overview of existing papers that use different types of data to address selective outmigration when estimating immigrants’ earnings profiles.

Earnings Profiles of Individuals with Undergraduate Degrees and Those with Graduate Degrees

Earnings Profiles of Individuals with Undergraduate Degrees and Those with Graduate Degrees

Occupational Sorting of School Graduates: The Role of Economic Preferences

We relate risk attitudes and patience of young graduates from high-school, college and university, measured around the time that they start their labor market career in a large representative survey, to the riskiness and timing of earnings in the occupations they choose to work in. We find a systematic positive and significant relation between willingness to take risks and measures of occupational earnings risks and employment risk that we derive from a large administrative data set. Patient individuals are significantly more likely to choose for occupations with a steep earnings profile. Individuals whose economic preferences are not well aligned with the riskiness and timing of earnings in their initial occupation are more likely to change to an occupation that better matches their economic preferences.

Future public pensions and changing employment patterns across birth cohorts

AbstractWe analyse the impacts of changing employment patterns and pension reforms on the future level of public pensions across birth cohorts in Germany. The analysis is based on a microsimulation model and a rich data set that combines household survey data from the German Socio-Economic Panel Study (SOEP) and process-produced microdata from the German pension insurance. We account for cohort effects in individual employment and unemployment affecting earnings over the life cycle as well as the differential impact of recent pension reforms. For individuals born between 1937 and 1971, cohort effects vary greatly by region, gender and education, and strongly affect life cycle earnings profiles. The largest effects can be observed for younger cohorts in East Germany and for the low educated. Using simulated life cycle employment and income profiles, we project gross future pensions across cohorts taking into account changing demographics and recent pension reforms. Simulations show that pension levels for East German men and women will fall dramatically among younger birth cohorts, not only because of policy reforms but also due to higher cumulated unemployment. For West German men, the small reduction of average pension levels among younger birth cohorts is mainly driven by the impact of pension reforms, while future pension levels of West German women are increasing or stable due to rising labour market participation of younger birth cohorts.

Career length: Effects of curvature of earnings profiles, earnings shocks, taxes, and social security

The same high labor supply elasticity that characterizes a representative family model with indivisible labor and employment lotteries also emerges without lotteries when self-insuring individuals choose interior solutions for their career lengths. Off corners, the more elastic is an earnings profile to accumulated working time, the longer is a workerʼs career. Negative (positive) unanticipated earnings shocks reduce (increase) the career length of a worker holding positive assets, while the effects are the opposite for a worker with negative assets. By inducing a worker to retire at an official retirement age, government provided social security can attenuate responses of career lengths to earnings profile slopes, earnings shocks, and taxes.

Industry or Academia, Basic or Applied? Career Choices and Earnings Trajectories of Scientists

We extend life cycle models of human capital investments by incorporating matching theory to examine the sorting pattern of heterogeneous scientists into different career trajectories. We link differences in physical capital investments and complementarities between basic and applied scientists across industry and academic settings to individual differences in scientist ability and preferences to predict an equilibrium matching of scientists to careers and to their earnings evolution. Our empirical analysis, using the National Science Foundation's Scientists and Engineers Statistical Data System database, is consistent with theoretical predictions of (i) sorting by ability into basic versus applied science among academic scientists, but not among industry scientists; and (ii) sorting by higher taste for nonmonetary returns into academia over industry. The evolution of an earnings profile is consistent with these sorting patterns: the earnings trajectories of basic and applied scientists are distinct from each other in academia but are similar in industry. This paper was accepted by Lee Fleming, entrepreneurship and innovation.

Management Insights

Management Insights

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.

Earnings Manipulation and the Cost of Capital

ABSTRACTThe widespread use of accounting information by investors and financial analysts to help value stocks creates an incentive for managers to manipulate earnings in an attempt to influence short‐term stock price performance. This paper examines the role of earnings management in affecting a firm's cost of capital. Using an agency model with multiple firms whose cash flows are correlated, we demonstrate that the extent of earnings manipulation varies across the business cycle. Depending on a firm's earnings profile, it can have stronger incentives to overstate its performance in good times or in bad times. Because of this dependence on the state of the economy, earnings manipulation can influence a firm's cost of capital despite the forces of diversification.

Post Schooling Human Capital Investments and the Life Cycle Variance of Earnings

We propose an original model of human capital investments after leaving school in which individuals differ in their initial human capital obtained at school, their rate of return, their costs of human capital investments and their terminal values of human capital at a fixed date in the future. We derive a tractable reduced form Mincerian model of log earnings profiles along the life cycle which is written as a linear factor model in which levels, growth and curvature of earnings profiles are individual-specific. Using panel data from a single cohort of French male wage earners observed over a long span of 30 years, a random effect model is estimated first by pseudo maximum likelihood methods. This step is followed by a simple second step fixed effect method by which individual-specific structural parameters are estimated. This allows us to test restrictions, compute counterfactual profiles and evaluate how earnings inequality over the life-cycle is affected by changes in structural parameters. Under some conditions, even small changes in life expectancy seem to imply large changes in earnings inequality.

What Flattened the Earnings Profile of Recent College Graduates?

Over their working lifetimes, college graduates who entered the workforce many decades ago experienced a greater increase in wages than more-recent college graduates.

Wealth portfolios and elite professional athletes

Defined contribution pension plans typically rely on some type of lifecycle allocation investment strategy. This approach has recently been shown to be sub-optimal due to the portfolio size effect. The terminal wealth of individuals with steadily increasing earnings over time is significantly less when using a lifecycle strategy compared with a simple contrarian approach. The adverse effect of an inappropriate asset allocation strategy for investors with unorthodox earnings profiles, such as for professional athletes, can be greatly magnified. We demonstrate that strategies that exploit the portfolio size effect vastly dominates terminal wealth earned using lifecycle strategies for individuals who experience unorthodox earning profiles, particularly those generating high investable incomes early in life. While the lifecycle strategy contains some attractive features relating to risk aversion and diminishing utility from wealth, we demonstrate that for unorthodox earnings profiles the case for taking advantage of the portfolio size effect is particularly strong.