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Decomposing Trends in Inequality in Earnings into Forecastable and Uncertain Components

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  • Flávio Cunha
  • James Heckman

Abstract

A substantial empirical literature documents the rise in wage inequality in the American economy. It is silent on whether the increase in inequality is due to components of earnings that are predictable by agents or whether it is due to greater uncertainty facing them. These two sources of variability have different consequences for both aggregate and individual welfare. Using data on two cohorts of American males, we find that a large component of the rise in inequality for less skilled workers is due to uncertainty. For skilled workers, the rise is less pronounced.

Suggested Citation

  • Flávio Cunha & James Heckman, 2016. "Decomposing Trends in Inequality in Earnings into Forecastable and Uncertain Components," Journal of Labor Economics, University of Chicago Press, vol. 34(S2), pages 31-65.
  • Handle: RePEc:ucp:jlabec:doi:10.1086/684121
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    References listed on IDEAS

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    Cited by:

    1. Salvador Navarro & Jin Zhou, 2017. "Identifying Agent's Information Sets: an Application to a Lifecycle Model of Schooling, Consumption, and Labor Supply," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 25, pages 58-92, April.
    2. Lance Lochner & Todd Stinebrickner & Utku Suleymanoglu, 2018. "Parental Support, Savings and Student Loan Repayment," NBER Working Papers 24863, National Bureau of Economic Research, Inc.
    3. Ian Fillmore & Trevor Gallen, 2019. "Heterogeneity in Talent or in Tastes? Implications for Redistributive Taxation," 2019 Meeting Papers 94, Society for Economic Dynamics.
    4. Swapnil Singh & Christian A. Stoltenbergz, 2018. "How Much Do Households Really Know About Their Future Income?," Bank of Lithuania Working Paper Series 55, Bank of Lithuania.

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