Life-cycle Earnings Research Articles

The Black–white lifetime earnings gap

The average white male born in 1900 earned 2.6 times more labor income over their lifetime than the average Black male. This gap is nearly twice as large as the more commonly studied cross-sectional Black–white earnings gap because 48% of Black males born in 1900 died before the age of 30 as compared to just 26% of white males. We calibrate a model of optimal consumption in a world with mortality risk to data describing the life-cycle earnings and survival probabilities of Black and white males born between 1900 and 1970. We find that convergence in Black and white mortality rates led to a 50% reduction in Black–white welfare gaps between the 1900 and 1920 birth cohorts, even as cross-sectional Black–white income gaps for those cohorts remained relatively constant. However, the Black–white welfare gap stagnated for the 1920 to 1970 birth cohorts as gaps in Black–white life expectancy and income remained stable and large.

Educational choice, initial wage and wage growth

We study the effects of expected initial wages, expected wage growth, and observed and unobserved heterogeneity in the choice of college major in a sample of American college graduates. We propose a three-stage empirical model that relates future earnings to individual choices. In the first stage, starting from revealed choices, observed wages, and life-cycle wage profiles, we estimate the expectation on initial wages and wage growth from the individual point of view, where the panel structure of the data allows us to produce estimates corrected for self-selection bias. We find substantial differences in expected real wages and expected real wage growth between majors and that both characteristics of life cycle earnings influence major choice. Our parametric models show a strong correlation between salary trends and major choice, whereas semiparametric models yield less reliable results. We interpret our results as being consistent with agents being rational and as a validation for our estimation strategy based on counterfactual imputation.

Earnings, labor market dynamics, and inequality in Sweden

AbstractIn this paper, we develop a comprehensive model of earnings and labor market dynamics, where employment and job change are endogenous. The model is estimated by applying the method of indirect inference on Swedish register data, and then used to carry out some policy experiments. There are three key conclusions from these experiments. First, employment shocks early in life can, to a larger extent, be mitigated before retirement compared with employment shocks occurring later. Second, we find that idiosyncratic productivity shocks, unobserved heterogeneity, and education contribute substantially to life‐cycle earnings inequality. Finally, we find that transitory shocks to employment risk have negative effects on earnings and employment in the short run but may increase labor market fluidity in the medium run.

Family background consistently affects economic success across the life cycle: A research note on how brother correlations overlap over the life course.

Scholars of social mobility increasingly study the role of family background in shaping attainment throughout the entire life course. However, research has yet to establish whether the family characteristics influencing early career attainment are the same as those influencing late career attainment. In this research note, I apply an extended sibling correlation approach to analyze brothers' life cycle earnings and family income, using data from the U.S. National Longitudinal Survey of Youth 1979. My analysis reveals a near-perfect correlation in the family characteristics that affect attainment at early, mid, and late career stages. This finding has significant implications for how mobility scholars conceptualize the impact of family background across a career. It suggests that family background forms a single, consistent dimension in determining attainment throughout the life course. Further analysis also indicates that the imperfect relationship between current and lifetime income is exclusively driven by within-family processes.

Lifecycle Earnings Risk and Insurance: New Evidence from Australia*

This paper studies the nature of earnings dynamics in Australia, using the Household, Income and Labour Dynamics in Australia (HILDA) Survey 2001–2020. Our results indicate that the distribution of earnings shocks displays negative skewness and excess kurtosis, deviating from the conventional linearity and normality assumptions. Wage changes are strongly associated with earnings changes and account more for the dispersion of earnings shocks; meanwhile, the contribution of hour changes is largely absent in upward movement and relatively small in downward movement of earnings changes. Furthermore, family and government insurance plays distinct roles in reducing exposure to earnings risk. Government insurance embedded in the targeted transfer system is important in mitigating the dispersion of shocks, whereas family insurance via income pooling and adjustment of secondary earners' labour market activities is dominant in reducing the magnitude and likelihood of extreme and rare shocks. The magnitude and persistence of earnings risk as well as the insurance role of family and government vary significantly across gender, marital and parental status. Accounting for these non‐Gaussian and non‐linearity features is important for evaluating the insurance role of government transfer programmes.

Lifecycle earnings risk and insurance: New evidence from Australia

Lifecycle earnings risk and insurance: New evidence from Australia

Misallocation and Inequality

For a large set of countries with different GDP per capita levels, we document how the distribution of labour earnings varies by development. Data reveals that the distribution of earnings changes with development in a particular way: while there is a larger mass at the left-tail, the right-tails shrinks, and moves towards the center. As a result, while the standard deviation of log earnings increases with development, the mean-to-median ratio declines. We interpret this fact within a model economy with heterogeneous workers and firms, which features industry dynamics, labor market frictions captured by a matching function, skill accumulation of workers with learning-by-doing and on-the-job training, and earnings inequality both across firms and workers. The benchmark economy is calibrated to the UK. We study how the earnings distribution changes as we increase two distortions in the benchmark economy: wedges on firms' output correlated with firm productivity and reductions in the labor market's ability to match unemployed workers and open vacancies. These distortions lead to the misallocation of resources and reduce employment and the GDP per capita. But they also affect how much firms are willing to pay to workers, how well higher skilled workers are matched with firms with higher productivity, and how much training workers receive. The model is consistent with a host of factors on how firm size distribution, firms' training decisions, and workers' life-cycle earnings profiles change with development and generates the observed patterns of changes in earnings distribution with development.

College and Lifecycle Earnings Inequality

Has a rising college earnings premium contributed to increased earnings inequality over the past 50 years? I answer this question with a model of college linked to a Ben-Porath human capital problem. The model is estimated from data on college attainment rates and lifecycle income profiles, which I document by education level. I find that lifetime earnings inequality within cohorts has risen significantly since the 1970s but little of this is directly attributable to the college premium. Higher tuition is also not particularly important. Increasing earnings risk seems to be the main driver, with higher college return dispersion a contributing factor.

Lifetime Earnings in the United States over Six Decades

Using panel data on individual earnings histories from 1957 to 2013, we document empirical facts about the distribution of lifetime earnings in the United States. First, from the cohort that entered the labor market in 1957 to the cohort that entered in 1983, median lifetime earnings of men declined by 10%–19%. Moreover, there was little-to-no rise in the lower three-quarters of the male lifetime earnings distribution during this period. Accounting for rising employer-provided health and pension bene- fits partly mitigates these findings but does not alter the substantive conclusions. For women, median lifetime earnings increased by 22%–33% from the 1957 to the 1983 cohort, but these gains were relative to the very low median lifetime earnings for the early cohorts. Much of the difference between newer and older cohorts comes from differences in median earnings at the time of labor market entry. Second, inequality in lifetime earnings has increased significantly within each gender group, but the closing lifetime gender gap has kept overall lifetime inequality virtually flat over the entire period. The increase among men is largely attributable to subsequent cohorts enter- ing the labor market with progressively higher levels of inequality, and not so much to faster inequality growth over the life cycle for newer cohorts. Partial life-cycle earnings data for younger cohorts indicate that both the stagnation of median lifetime earnings and the rise in lifetime inequality are likely to continue.

What Do Data on Millions of U.S. Workers Reveal About Lifecycle Earnings Dynamics?

We study individual male earnings dynamics over the life cycle using panel data on millions of U.S. workers. Using nonparametric methods, we first show that the distribution of earnings changes exhibits substantial deviations from lognormality, such as negative skewness and very high kurtosis. Further, the extent of these nonnormalities varies significantly with age and earnings level, peaking around age 50 and between the 70th and 90th percentiles of the earnings distribution. Second, we estimate nonparametric impulse response functions and find important asymmetries: Positive changes for high‐income individuals are quite transitory, whereas negative ones are very persistent; the opposite is true for low‐income individuals. Third, we turn to long‐run outcomes and find substantial heterogeneity in the cumulative growth rates of earnings and the total number of years individuals spend nonemployed between ages 25 and 55. Finally, by targeting these rich sets of moments, we estimate stochastic processes for earnings that range from the simple to the complex. Our preferred specification features normal mixture innovations to both persistent and transitory components and includes state‐dependent long‐term nonemployment shocks with a realization probability that varies with age and earnings.

Modeling life-cycle earnings risk with positive and negative shocks

We estimate explicit age-varying distributions of idiosyncratic persistent and transitory earnings shocks over workers' life-cycles using a German administrative data set. Large positive shocks, both transitory and persistent, are characteristic for the first eight years of the working life. After the age of 50, large negative shocks become a major source of earnings risk. Between the ages of 30 and 50, most shocks are small and transitory. Large persistent positive shocks that occur early in the working life help to rationalize large wealth and consumption shares of the top one percent in an incomplete markets model.

Life-Cycle Earnings Curves and Safe Savings Rates

Analyses of savings rates needed for successful retirement rates (SSRs) typically assume constant real earnings growth throughout one’s career. However, data on the life-cycle earnings patterns of millions of U.S. workers suggest that earnings growth does not occur at a constant rate that matches inflation. Instead, earnings tend to increase at a decreasing rate during the early years of one’s career and decrease at an increasing rate in the later years. Utilizing simulations of saving and dissaving throughout the life cycle based on both historical market returns and forecasted returns, the authors examine the impact of assuming more realistic earnings growth relative to constant inflation-adjusted growth. Results indicate that failing to account for more realistic earnings curves throughout the life cycle may overstate SSRs for lower-income households while understating SSRs for higher-income households, and understate SSRs for younger households while overstating SSRs for older households. Furthermore, historical SSRs of 10% or less are found for all but the highest-income households after accounting for more realistic earnings curves and Social Security benefits—though variations in specific effects may exist based on the simulation methods utilized.

Evidence that prenatal testosterone transfer from male twins reduces the fertility and socioeconomic success of their female co-twins

During sensitive periods in utero, gonadal steroids help organize biological sex differences in humans and other mammals. In litter-bearing species, chromosomal females passively exposed to prenatal testosterone from male littermates exhibit altered physical and behavioral traits as adults. The consequences of such effects are less well understood in humans, but recent near-doubling of twinning rates in many countries since 1980, secondary to advanced maternal age and increased reliance on in vitro fertilization, means that an increasing subset of females in many populations may be exposed to prenatal testosterone from their male co-twin. Here we use data on all births in Norway (n = 728,842, including 13,800 twins) between 1967 and 1978 to show that females exposed in utero to a male co-twin have a decreased probability of graduating from high school (15.2%), completing college (3.9%), and being married (11.7%), and have lower fertility (5.8%) and life-cycle earnings (8.6%). These relationships remain unchanged among the subsets of 583 and 239 females whose male co-twin died during the first postnatal year and first 28 days of life, respectively, supporting the interpretation that they are due primarily to prenatal exposure rather than to postnatal socialization effects of being raised with a male sibling. Our findings provide empirical evidence, using objectively measured nation-level data, that human females exposed prenatally to a male co-twin experience long-term changes in marriage, fertility, and human capital. These findings support the hypothesis of in utero testosterone transfer between twins, which is likely affecting a small but growing subset of females worldwide.

Evaluating alternative approaches for predicting pension benefits and incentives

AbstractIn an effort to promote comparative research on pensions, the Gateway to Global Aging Data is developing harmonized cross-national panel data on pension benefits and retirement incentives. Past research has varied in how it predicts pension benefits for individuals who have not yet claimed their benefits when administrative data on earnings histories is unavailable. We use the Gateway data to evaluate several alternative approaches to computing prospective pension benefits using common survey questions and validate them against matched administrative data. We find that in some settings naïve measures of pension benefit growth from continued work and delayed benefit claiming can perform as well as measures based on administrative data. We also find that prospective benefit levels are sensitive to the heterogeneity of lifecycle earnings dynamics, resulting in substantial measurement error even after accounting for work history.

Modelling higher education financing reform for Ireland

This paper examines the feasibility of various alternative student loan schemes for Ireland. Using data from a large employer survey, we model the life-cycle earnings distribution for Irish graduates. We then use these estimates to simulate the effects of alternative types of student loans, including mortgage-type loans and income-contingent loans of various designs, incorporating participation and migration patterns into the simulations. The results show that mortgage-type loans entail unsustainably high repayment rates for low income graduates. Through the specification of several alternative income-contingent loan schemes, it is demonstrated that this approach to higher education financing is feasible both in terms of affordability for graduates and with respect to implied government subsidies. There are some important policy design issues to be addressed and we conclude with some recommendations for a future Irish scheme.

Explaining cross-cohort differences in life-cycle earnings

College-educated workers entering the labor market in 1940 experienced a 4-fold increase in their labor earnings between the ages of 25 and 55; in contrast, the increase was 2.6-fold for those entering the market in 1980. For workers without a college education these figures are 3.6-fold and 1.5-fold, respectively. Why are earnings profiles flatter for recent cohorts? We build a parsimonious model of schooling and human capital accumulation on the job, and calibrate it to earnings statistics of workers from the 1940 cohort. The model accounts for 99% of the flattening of earnings profiles for workers with a college education between the 1940 and the 1980 cohorts (52% for workers without a college education). The flattening in our model results from a single exogenous factor: the increasing price of skills. The higher skill price induces (i) higher college enrollment for recent cohorts and thus a change in the educational composition of workers and (ii) higher human capital at the start of work life for college-educated workers in the recent cohorts, which implies lower earnings growth over the life cycle.

Learning by Doing and Ben-Porath: Life-cycle Predictions and Policy Implications

Many government policies affect incentives to acquire human capital. Two workhorse models dominate the literature analyzing these policies: Learning by Doing (LBD) and Ben-Porath (BP). This paper makes two novel findings related to these models. First, LBD and BP generate different predictions for life-cycle earnings growth. BP predicts that the heterogeneity in earnings growth rates across workers should disappear over the life-cycle because the workers stop investing as they age. The LBD model cannot replicate this feature because workers accumulate human capital automatically throughout the life-cycle. Second, the same model features that generate different life-cycle predictions between BP and LBD also generate different implications for policies that affect the payoff to human capital accumulation. To illustrate this quantitatively, I show that increasing marginal labor tax rates for top earners depresses human capital accumulation more under BP. As a result, the Laffer curve for top marginal income tax rates is flatter, and peaks 10 percentage points lower, with BP versus LBD.

Learning by Doing and Ben-Porath: Life-cycle Predictions and Policy Implications

Many government policies affect incentives to acquire human capital. Two workhorse models dominate the literature analyzing these policies: Learning by Doing (LBD) and Ben-Porath (BP). This paper makes two novel findings related to these models. First, LBD and BP generate different predictions for life-cycle earnings growth. BP predicts that the heterogeneity in earnings growth rates across workers should disappear over the life-cycle because the workers stop investing as they age. The LBD model cannot replicate this feature because workers accumulate human capital automatically throughout the life-cycle. Second, the same model features that generate different life-cycle predictions between BP and LBD also generate different implications for policies that affect the payoff to human capital accumulation. To illustrate this quantitatively, I show that increasing marginal labor tax rates for top earners depresses human capital accumulation more under BP. As a result, the Laffer curve for top marginal income tax rates is flatter, and peaks 10 percentage points lower, with BP versus LBD.

The job ladder and its implications for earnings risk

This paper analyzes the ability of a job ladder framework to explain recent evidence on life-cycle earnings dynamics. Using administrative data, Guvenen et al. (2015) document several new facts about the distribution of earnings growth, most notably large negative skewness and high excess kurtosis, rejecting the frequently used log-normal framework. I show that these new facts can be well explained by a standard structural representation of a frictional labor market, a life-cycle version of the job ladder model, in combination with a simple human capital process. Furthermore, I identify endogenous search effort, risk aversion and wealth accumulation, and skill loss in unemployment as key model features that interact with the labor market friction to jointly reconcile the evidence.

Managers and productivity differences

We document that for a group of high-income countries the life-cycle earnings growth of managers relative to non-managers is positively correlated with output per worker. We interpret this evidence through the lens of an equilibrium life-cycle, span-of-control model where managers invest in their skills. We use the model to quantify the importance of exogenous productivity differences and the size-dependent distortions emphasized in the misallocation literature. Our findings indicate that such distortions are critical to generate the observed differences in the growth of relative managerial earnings across countries. Distortions that halve the growth of relative managerial earnings, a move from the U.S. to Italy in our data, lead to a reduction in managerial quality of 27% and to a reduction in output of about nearly 7% – more than half of the observed gap between the U.S. and Italy. Cross-country variation in distortions accounts for about 42% of the cross-country variation in output per worker gap with the U.S.