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An empirical analysis of income dynamics among men in the PSID: 1968-1989

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  • John F. Geweke
  • Michael P. Keane

Abstract

This study uses data from the Panel Survey of Income Dynamics (PSID) to address a number of questions about life cycle earnings mobility. It develops a dynamic reduced form model of earnings and marital status that is nonstationary over the life cycle. The study reaches several firm conclusions about life cycle earnings mobility. Incorporating non-Gaussian shocks makes it possible to account for transitions between low and higher earnings states, a heretofore unresolved problem. The non-Gaussian distribution substantially increases the lifetime return to post-secondary education, and substantially reduces differences in lifetime wages attributable to race. In a given year, the majority of variance in earnings not accounted for by race, education and age is due to transitory shocks, but over a lifetime the majority is due to unobserved individual heterogeneity. Consequently, low earnings at early ages are strong predictors of low earnings later in life, even conditioning on observed individual characteristics.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 233.

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Date of creation: 1997
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Handle: RePEc:fip:fedmsr:233

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Keywords: Income distribution;

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References

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  1. Shorrocks, A F, 1976. "Income Mobility and the Markov Assumption," Economic Journal, Royal Economic Society, vol. 86(343), pages 566-78, September.
  2. MaCurdy, Thomas E., 1982. "The use of time series processes to model the error structure of earnings in a longitudinal data analysis," Journal of Econometrics, Elsevier, vol. 18(1), pages 83-114, January.
  3. Gottschald, Peter T, 1982. "Earnings Mobility: Permanent Change or Transitory Fluctuations," The Review of Economics and Statistics, MIT Press, vol. 64(3), pages 450-56, August.
  4. Horowitz, J.L. & Markatou, M., 1993. "Semiparametric Estimation of Regression Models for Panel Data," Working Papers 93-14, University of Iowa, Department of Economics.
  5. John F. Geweke, 1995. "Posterior simulators in econometrics," Working Papers 555, Federal Reserve Bank of Minneapolis.
  6. Lillard, Lee A & Willis, Robert J, 1978. "Dynamic Aspects of Earning Mobility," Econometrica, Econometric Society, vol. 46(5), pages 985-1012, September.
  7. Joel L. Horowitz & Marianthi Markatou, 1993. "Semiparametric Estimation Of Regression Models For Panel Data," Econometrics 9309001, EconWPA.
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Cited by:
  1. Tom Krebs, 2003. "Growth and Welfare Effects of Business Cycles in Economies with Idiosyncratic Human Capital Risk," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 846-868, October.
  2. Michael P. Keane & Robert M. Sauer, 2010. "A Computationally Practical Simulation Estimation Algorithm for Dynamic Panel Data Models with Unobserved Endogenous State Variables," Working Papers 1008, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz, revised 05 Jul 2010.
  3. Maury Gittleman & Mary Joyce, 1999. "Have family income mobility patterns changed?," Demography, Springer, vol. 36(3), pages 299-314, August.
  4. Shane T. Jensen & Stephen H. Shore, 2008. "Changes in the Distribution of Income Volatility," Papers 0808.1090, arXiv.org.

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