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The great moderation in micro labor earnings

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  • Sabelhaus, John
  • Song, Jae
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Abstract

Between 1980 and the early 1990s the variability of labor earnings growth rates across the prime-age working population fell significantly. This decline and timing are consistent with other macro and micro observations about growth variability that are collectively referred to as the "Great Moderation." The variability of earnings growth is negatively correlated with age at any point in time, and the U.S. working age population got older during this period because the Baby Boom was aging. However, the decrease in variability was roughly uniform across all age groups, so population aging is not the source of the overall decline. The variance of log changes also declined at multi-year frequencies in such a way as to suggest that both permanent and transitory components of earnings shocks became more moderate. A simple identification strategy for separating age and cohort effects shows a very intuitive pattern of permanent and transitory shocks over the life cycle, and confirms that a shift over time in the stochastic process occurred even after controlling for age effects.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 57 (2010)
Issue (Month): 4 (May)
Pages: 391-403

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Handle: RePEc:eee:moneco:v:57:y:2010:i:4:p:391-403

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Web page: http://www.elsevier.com/locate/inca/505566

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Keywords: Labor earnings Earnings volatility Great moderation;

References

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  1. Meghir, Costas & Pistaferri, Luigi, 2002. "Income Variance Dynamics and Heterogeneity," CEPR Discussion Papers 3632, C.E.P.R. Discussion Papers.
  2. Steven J. Davis & James A. Kahn, 2008. "Interpreting the Great Moderation: changes in the volatility of economic activity at the macro and micro Levels," Staff Reports 334, Federal Reserve Bank of New York.
  3. Carroll, Christopher D. & Samwick, Andrew A., 1997. "The nature of precautionary wealth," Journal of Monetary Economics, Elsevier, vol. 40(1), pages 41-71, September.
  4. Deaton, Angus & Paxson, Christina, 1994. "Intertemporal Choice and Inequality," Journal of Political Economy, University of Chicago Press, vol. 102(3), pages 437-67, June.
  5. Gourinchas, Pierre-Olivier & Parker, Jonathan A, 2000. "Consumption Over the Life-Cycle," CEPR Discussion Papers 2345, C.E.P.R. Discussion Papers.
  6. Fatih Guvenen, 2005. "Learning Your Earning: Are Labor Income Shocks Really Very Persistent?," Macroeconomics 0507004, EconWPA.
  7. Peter Gottschalk & Robert Moffitt, 1994. "The Growth of Earnings Instability in the U.S. Labor Market," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(2), pages 217-272.
  8. Dynan Karen & Elmendorf Douglas & Sichel Daniel, 2012. "The Evolution of Household Income Volatility," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(2), pages 1-42, December.
  9. Fatih Guvenen, 2007. "An Empirical Investigation of Labor Income Processes," NBER Working Papers 13394, National Bureau of Economic Research, Inc.
  10. Cunha, Flavio & Heckman, James J. & Navarro, Salvador, 2004. "Separating Uncertainty from Heterogeneity in Life Cycle Earnings," IZA Discussion Papers 1437, Institute for the Study of Labor (IZA).
  11. Joseph Altonji & Anthony Smith & Ivan Vidangos, 2009. "Modeling earnings dynamics," Finance and Economics Discussion Series 2009-08, Board of Governors of the Federal Reserve System (U.S.).
  12. David H. Autor & Lawrence F. Katz & Melissa S. Kearney, 2008. "Trends in U.S. Wage Inequality: Revising the Revisionists," The Review of Economics and Statistics, MIT Press, vol. 90(2), pages 300-323, May.
  13. Hamish Low & Costas Meghir & Luigi Pistaferri, 2008. "Wage risk and employment risk over the life cycle," IFS Working Papers W08/06, Institute for Fiscal Studies.
  14. Erik Hurst & Mark Aguiar, 2008. "Deconstructing Lifecycle Expenditure," 2008 Meeting Papers 771, Society for Economic Dynamics.
  15. Thomas Lemieux, 2007. "The Changing Nature of Wage Inequality," NBER Working Papers 13523, National Bureau of Economic Research, Inc.
  16. Mark Aguiar & Erik Hurst, 2008. "Deconstructing Lifecycle Expenditure," NBER Working Papers 13893, National Bureau of Economic Research, Inc.
  17. Sabelhaus, John & Song, Jae, 2009. "Earnings Volatility Across Groups and Time," National Tax Journal, National Tax Association, vol. 62(2), pages 347-64, June.
  18. Robert A. Moffitt & Peter Gottschalk, 2002. "Trends in the Transitory Variance of Earnings in the United States," Economic Journal, Royal Economic Society, vol. 112(478), pages C68-C73, March.
  19. Peter Gottschalk & Robert Moffitt, 2009. "The Rising Instability of U.S. Earnings," Journal of Economic Perspectives, American Economic Association, vol. 23(4), pages 3-24, Fall.
  20. Christopher D. Carroll, 1992. "The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(2), pages 61-156.
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Citations

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Cited by:
  1. Christopher Carroll & Jiri Slacalek & Martin Sommer, 2012. "Dissecting Saving Dynamics: Measuring Wealth, Precautionary, and Credit Effects," Economics Working Paper Archive 602, The Johns Hopkins University,Department of Economics.
  2. Christopher Carroll & Martin Sommer & Jiri Slacalek, 2012. "Dissecting Saving Dynamics," IMF Working Papers 12/219, International Monetary Fund.
  3. Fatih Guvenen, 2011. "Macroeconomics With Heterogeneity: A Practical Guide," NBER Working Papers 17622, National Bureau of Economic Research, Inc.
  4. repec:fip:fedreq:y:2011:i:3q:p:255-326:n:vol.97no.3 is not listed on IDEAS
  5. Fatih Guvenen & Serdar Ozkan & Jae Song, 2012. "The nature of countercyclical income risk," Staff Report 476, Federal Reserve Bank of Minneapolis.
  6. Fatih Karahan & Serdar Ozkan, 2013. "On the Persistence of Income Shocks over the Life Cycle: Evidence, Theory, and Implications," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(3), pages 452-476, July.
  7. Jonathan A. Schwabish & Julie H. Topoleski, 2013. "Modeling Individual Earnings in CBO’s Long-Term Microsimulation Model: Working Paper 2013-04," Working Papers 44306, Congressional Budget Office.
  8. Christopher D. Carroll, 2012. "Implications of Wealth Heterogeneity For Macroeconomics," Economics Working Paper Archive 597, The Johns Hopkins University,Department of Economics.

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