Individual Labor Earnings Research Articles

Dissecting Idiosyncratic Earnings Risk

Abstract This paper examines whether nonlinear and non-Gaussian features of earnings dynamics are caused by hours or hourly wages. Our findings from the Norwegian administrative and survey data are as follows: (i) Nonlinear mean reversion in earnings is driven by the dynamics of hours worked rather than wages since wage dynamics are close to linear, while hours dynamics are nonlinear—negative changes to hours are transitory, while positive changes are persistent. (ii) Large earnings changes are driven equally by hours and wages, whereas small changes are associated mainly with wage shocks. (iii) Both wages and hours contribute to negative skewness and high kurtosis for earnings changes, although hour-wage interactions are quantitatively more important. (iv) When considering household earnings and disposable household income, the deviations from normality are mitigated relative to individual labor earnings: changes in disposable household income are approximately symmetric and less leptokurtic.

Estimation of intergenerational mobility in small samples: evidence from German survey data

Using data from the German socio-economic panel, this paper provides new evidence on intergenerational mobility in Germany by focusing on intergenerational association in ranks—i.e. positions, which parents and children occupy in their respective income distributions. We find that the association of children’s ranks with ranks of their fathers is about 0.242 for individual labor earnings and it is higher for sons than for daughters. It is also higher in East Germany compared to West Germany. The results further show that rank-based measures of mobility are less sensitive than conventional measures of intergenerational income elasticity to different methodological and sample specification choices, such as the stages of the life cycle when incomes of children and parents are measured, the number of years for which incomes are considered, the treatment of zero values in income variables and the choice of annual versus hourly earnings. Moreover, they are more robust for sub-group comparisons of intergenerational mobility (e.g. across gender and region). This evidence suggests that, similarly to large administrative datasets, rank-based measures of intergenerational mobility perform better than elasticity-based measures in small samples based on survey data.

Dissecting Idiosyncratic Earnings Risk

This paper examines whether nonlinear and non-Gaussian features of earnings dynamics are caused by hours or hourly wages. Our findings from the Norwegian administrative and survey data are as follows: (i) Nonlinear mean reversion in earnings is driven by the dynamics of hours worked rather than wages since wage dynamics are close to linear while negative changes to hours are transitory and positive changes are persistent. (ii) Large earnings changes are driven equally by hours and wages, whereas small changes are associated mainly with wage shocks. (iii) Both wages and hours contribute to negative skewness and high kurtosis for earnings changes, although hour-wage interactions are quantitatively more important. (iv) When considering household earnings and disposable household income, the deviations from normality are mitigated relative to individual labor earnings: changes in disposable household income are close to symmetric and less leptokurtic.

Inequality of Opportunity in China's Labor Earnings: The Gender Dimension

AbstractThis paper investigates the inequality of opportunity in China's labor earnings, defined as the component of inequality determined by personal circumstances that lie beyond the control of an individual, of which gender is one, as opposed to the component determined by personal efforts. Using the Survey of Women's Social Status in China (2010), we measure the share of inequality of opportunity in the total inequality of individual labor earnings for people aged 26–55 years, and separately for six birth cohorts and for female and male subsamples. Gender is revealed as the single most important circumstance determining nationwide individual labor earnings, with one's region of residence, father's occupation, father's education, birth cohort and holding rural or urban hukou also playing significant roles. A further investigation into the roles of circumstances and personal efforts (including education level, occupation, Communist Party membership, migration and marital status) confirms that circumstances play an alarmingly high role in shaping labor earnings distribution in China, and reveals notable gender differences that cannot be attributed to personal effort alone. These results provide the basis for recommending ways to improve gender equality of opportunity in the future.

Income and Earnings Mobility in U.S. Tax Data

We use a large panel of federal income tax data to investigate intragenerational income mobility in the United States. We have two primary objectives. First, we explore the determinants of two-year changes in individual labor earnings and family incomes, such as job or industry changes, marriage, divorce, and geographic mobility. Second, we evaluate how federal income taxes stabilize or destabilize post-tax income changes relative to pre-tax changes. We find a relatively high degree of income mobility, with almost half of workers exhibiting earnings increases or decreases of at least 25 percent, and two-fifths of tax units experiencing income changes of this magnitude. Male and female labor income mobility patterns are remarkably similar, though marriage is associated with earnings gains among men, but is associated with modest earnings declines among women. We also observe that large income gains are most likely among families that add workers -- either through marriage or through a second family member entering the workforce.

Income and Earnings Mobility in U.S. Tax Data

We use a large panel of federal income tax data to investigate intragenerational income mobility in the United States. We have two primary objectives. First, we explore the determinants of two year changes in individual labor earnings and family incomes, such as job or industry changes, marriage, divorce, and geographic mobility. Second, we evaluate how federal income taxes stabilize or destabilize post-tax income changes relative to pre-tax changes. We find a relatively high degree of income mobility, with almost half of workers exhibiting earnings increases or decreases of at least 25 percent, and two-fifths of tax units experiencing income changes of this magnitude. Male and female labor income mobility patterns are remarkably similar, though marriage is associated with earnings gains among men, but is associated with modest earnings declines among women. We also observe that large income gains are most likely among families that add workers – either through marriage or through a second family member entering the workforce.

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.

Income and Earnings Mobility in U.S. Tax Data

We use a large panel of federal income tax data to investigate intragenerational income mobility in the United States. We have two primary objectives. First, we explore the determinants of two-year changes in individual labor earnings and family incomes, such as job or industry changes, marriage, divorce, and geographic mobility. Second, we evaluate how federal income taxes stabilize or destabilize post-tax income changes relative to pre-tax changes. We find a relatively high degree of income mobility, with almost half of workers exhibiting earnings increases or decreases of at least 25 percent, and two-fifths of tax units experiencing income changes of this magnitude. Male and female labor income mobility patterns are remarkably similar, though marriage is associated with earnings gains among men, but is associated with modest earnings declines among women. We also observe that large income gains are most likely among families that add workers - either through marriage or through a second family member entering the workforce.

Changes in the Distribution of Earnings Volatility

Recent research has documented a rise in the volatility of individual labor earnings in the United States since 1970. Existing measures of this trend abstract from within-group latent heterogeneity, effectively estimating an increase in average volatility for observable groups. We decompose this average and find no systematic rise in volatility for the vast majority of individuals. Increasing average volatility has been driven almost entirely by rising earnings volatility of those with the most volatile earnings, identified ex ante by large past earnings changes. We characterize dynamics of the volatility distribution with a nonparametric Bayesian stochastic volatility model from Jensen and Shore (2011).

Agglomeration of Knowledge: A Regional Economic Analysis for the German Economy

We investigate the effects of job-specific knowledge for individual labor earnings of workers in the German economy. The results indicate a positive effect for earnings stemming in particular from high-knowledge in the areas of sales and marketing, computers and electronics, mathematics, biology and law and government. Investigating the geographical concentration of employment reveals, for example, that workers with high-knowledge in the field of communication and media are concentrated in just a few places whereas workers with high-knowledge in law and government and administration and management are far more dispersed over the regions. These patterns of geographical localization of employment give evidence for differences in the dissemination of knowledge across peers and customers.

Does Trust Pay Off?

Do individuals with a trusting perception towards strangers have higher incomes? This paper exploits a data driven classification method to measure interpersonal trust. Contrary to previous studies, trust is conceptualized as a personal skill related to social intelligence. It is hypothesized that individuals who are better able to discern helpful individuals from self-interested individuals will be more trusting, and will have a lower probability of being exploited. The latter should be visible through an increase in the individual's economic performance. Using micro-economic data from the German Socio-Economic Panel (2003,2008) a latent class model is estimated, which results in two distinct trust classes: one for low, and one for high trust individuals. Subsequently, by entering class membership in a two-wave panel analysis the study finds that belonging to the high trust class positively influences an individual's economic performance, as measured by annual individual labor earnings and hourly wages. Furthermore, low-trust individuals from 2003 that move towards the high-trust class in 2008 show a trust-related income increase of 6 to 9% as compared to individuals that remained in the low-trust category. Using the observed response to the survey question “Do you think that most people are helpful, or that they are self-interested?” as instrumental variable, I show that trust related income differences between and within individuals are robust against endogeneity.

CAN HOUSEHOLDS AND WELFARE STATES MITIGATE RISING EARNINGS INSTABILITY?

We compare the evolution of earnings instability in Germany and the United Kingdom, two countries which stand for different types of welfare states. Deploying data from the German Socio‐Economic Panel (SOEP) and the British Household Panel Survey (BHPS), we estimate permanent and transitory variances of male income over the period 1984–2009 and 1991–2006, respectively. Studies in this literature generally use individual labor earnings. To uncover the role of welfare state and households in smoothening earnings shocks, we compute different income concepts ranging from gross earnings to net equivalent household income. We find evidence that the overall inequality of earnings in Germany and the United Kingdom has been rising throughout the period due to both higher permanent earnings inequality and higher earnings volatility. However, taking institutions of the welfare state and risk‐sharing households into account, we find that the volatility of net household income has remained fairly stable. Furthermore, redistribution and risk insurance provided by the welfare state is more pronounced in Germany than in the United Kingdom.

ON‐THE‐JOB SEARCH, PRODUCTIVITY SHOCKS, AND THE INDIVIDUAL EARNINGS PROCESS*

Individual labor earnings observed in worker panel data have complex, highly persistent dynamics. We investigate the capacity of a structural job search model with on‐the‐job search, wage renegotiation by mutual consent, and i.i.d. productivity shocks to replicate salient properties of these dynamics, such as the covariance structure of earnings, the evolution of individual earnings mean, and variance with the duration of uninterrupted employment, or the distribution of year‐to‐year earnings changes. Structural estimation of our model on a 12‐year panel of highly educated British workers shows that our simple framework produces a dynamic earnings structure that is remarkably consistent with the data.

Income Distributions in Two Experimental Economies

Data on individual labor earnings are reported from two experimental economies where the primary factors responsible for income differences were differences in tastes for market income versus leisure and differences in abilities working manual job tasks. Measured income dispersion under these conditions was strikingly similar to that in the United states and other market economies, indicating that these two factors alone are sufficient to generate such income differences. Further, in tests of the functional form of the distributions of income, the hypothesis of lognormality fit better than the hypothesis of normality, just as it does in national data.