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Permanent and Transitory Wage Inequality of British Men, 1975-2001: Year, Age and Cohort Effects

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  • Kalwij, Adriaan

    ()
    (Utrecht School of Economics)

  • Alessie, Rob

    ()
    (Utrecht University)

Abstract

We examine the variance-covariance structure of log-wages over time and over the lifecycle of British men from 1975 to 2001, hereby controlling for cohort effects. Wage inequality has risen sharply during the 1980’s and early 1990’s and remained fairly constant in the second half of the 1990’s. We show that this increase is caused mainly by a strong increase in the transitory wage inequality and only to a lesser extent to an increase in the permanent wage inequality. The transitory component of wages is, however, highly persistent over time: serial correlation decreases from 0.88 over a one-year period to 0.65 over a ten-year period. The constant wage inequality in the second half of the 1990’s is attributed to a slight decrease in permanent wages inequality, a stabilization of the variance of the transitory wage shock, and the strong decrease in the transitory wage inequality for the cohorts entering employment since the end of the 1980’s. Ignoring age effects in transitory wage inequality and cohort effects, as is commonly done, leads to severely distorted inferences concerning the changes in permanent wage inequality.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 686.

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Length: 44 pages
Date of creation: Jan 2003
Date of revision:
Publication status: published in: Journal of Applied Econometrics, 2007, 22 (6), 1063 - 1093
Handle: RePEc:iza:izadps:dp686

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Keywords: mobility; wage distribution; panel data; inequality;

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Cited by:
  1. Lorenzo Cappellari & Marco Leonardi, 2013. "Earnings Instability and Tenure," CESifo Working Paper Series 4145, CESifo Group Munich.
  2. Cervini-Plá, María & Ramos, Xavi, 2008. "Long Term Earnings Inequality, Earnings Instability and Temporary Employment in Spain: 1993–2000," IZA Discussion Papers 3538, Institute for the Study of Labor (IZA).
  3. repec:dgr:unumer:2011077 is not listed on IDEAS
  4. Adriaan Kalwij & Gregory, M., 2004. "WP 22 - A panel data analysis of the effects of wages, standard hours and unionisation on paid overtime work in Britain," AIAS Working Papers wp22, AIAS, Amsterdam Institute for Advanced Labour Studies.
  5. SOLOGON Denisa & O?DONOGHUE Cathal, 2010. "Earnings dynamics and inequality in the EU, 1994-2001," CEPS/INSTEAD Working Paper Series 2010-34, CEPS/INSTEAD.
  6. Stephen Hynes & Cathal O’Donoghue, 2005. "Trends in Farm Income Mobility and Inequality in Ireland," Working Papers 0505, Rural Economy and Development Programme,Teagasc.
  7. Sologon, Denisa Maria & O'Donoghue, Cathal, 2009. "Earnings Dynamics and Inequality among Men across 14 EU Countries, 1994-2001: Evidence from ECHP," IZA Discussion Papers 4012, Institute for the Study of Labor (IZA).
  8. Gordon L. Clark & Roberto Durán-Fernández & Kendra Strauss, 2010. "'Being in the market': the UK house-price bubble and the intended structure of individual pension investment portfolios," Journal of Economic Geography, Oxford University Press, vol. 10(3), pages 331-359, May.
  9. SOLOGON Denisa & O?DONOGHUE Cathal, 2012. "Shaping earnings instability: labour market policy and institutional factors," CEPS/INSTEAD Working Paper Series 2012-06, CEPS/INSTEAD.
  10. Sologon, Denisa Maria & O'Donoghue, Cathal, 2010. "Earnings Dynamics and Inequality among Men in Luxembourg, 1988-2004: Evidence from Administrative Data," IZA Discussion Papers 5014, Institute for the Study of Labor (IZA).

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