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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. Steven J. Davis & James A. Kahn, 2008. "Interpreting the Great Moderation: Changes in the Volatility of Economic Activity at the Macro and Micro Levels," Journal of Economic Perspectives, American Economic Association, vol. 22(4), pages 155-80, Fall.
  2. Fatih Guvenen, 2006. "Learning your earning: are labor income shocks really very persistent?," Discussion Paper / Institute for Empirical Macroeconomics 145, Federal Reserve Bank of Minneapolis.
  3. Hamish Low & Costas Meghir & Luigi Pistaferri, 2009. "Wage Risk and Employment Risk over the Life Cycle," NBER Working Papers 14901, National Bureau of Economic Research, Inc.
  4. 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.
  5. Gourinchas, Pierre-Olivier & Parker, Jonathan A, 2000. "Consumption Over the Life-Cycle," CEPR Discussion Papers 2345, C.E.P.R. Discussion Papers.
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  7. Thomas Lemieux, 2008. "The changing nature of wage inequality," Journal of Population Economics, Springer, vol. 21(1), pages 21-48, January.
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  9. Flavio Cunha & James J. Heckman & Salvador Navarro, 2005. "Separating Uncertainty from Heterogeneity in Life Cycle Earnings," NBER Working Papers 11024, National Bureau of Economic Research, Inc.
  10. Mark Aguiar & Erik Hurst, 2008. "Deconstructing Lifecycle Expenditure," Working Papers, University of Michigan, Michigan Retirement Research Center wp173, University of Michigan, Michigan Retirement Research Center.
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  12. 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.
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  15. Robert A. Moffitt & Peter Gottschalk, 2002. "Trends in the Transitory Variance of Earnings in the United States," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 112(478), pages C68-C73, March.
  16. Karen E. Dynan & Douglas W. Elmendorf & Daniel E. Sichel, 2007. "The evolution of household income volatility," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2007-61, Board of Governors of the Federal Reserve System (U.S.).
  17. 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.
  18. Carroll, Christopher D. & Samwick, Andrew A., 1997. "The nature of precautionary wealth," Journal of Monetary Economics, Elsevier, Elsevier, vol. 40(1), pages 41-71, September.
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  20. Sabelhaus, John & Song, Jae, 2009. "Earnings Volatility Across Groups and Time," National Tax Journal, National Tax Association, vol. 62(2), pages 347-64, June.
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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 D. Carroll, 2012. "Implications of Wealth Heterogeneity For Macroeconomics," Economics Working Paper Archive 597, The Johns Hopkins University,Department of Economics.
  3. Fatih Guvenen & Serdar Ozkan & Jae Song, 2012. "The nature of countercyclical income risk," Staff Report, Federal Reserve Bank of Minneapolis 476, Federal Reserve Bank of Minneapolis.
  4. repec:fip:fedreq:y:2011:i:3q:p:255-326:n:vol.97no.3 is not listed on IDEAS
  5. 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.
  6. Fatih Guvenen, 2011. "Macroeconomics with hetereogeneity : a practical guide," Economic Quarterly, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue 3Q, pages 255-326.
  7. Christopher Carroll & Martin Sommer & Jiri Slacalek, 2012. "Dissecting Saving Dynamics," IMF Working Papers 12/219, International Monetary Fund.
  8. 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.

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