Trends in the Transitory Variance of Male Earnings in the U.S., 1970-2004

We estimate the trend in the transitory variance of male earnings in the U.S. using the Michigan Panel Study of Income Dynamics from 1970 to 2004. Using both an error components model as well as simpler but more approximate methods, we find that the transitory variance increased substantially in the 1980’s and then remained at this new higher level through 2004 We also find a strong cyclical component to the transitory variance. Its increase accounts for between 30 and 65 percent of the total rise in cross-sectional variance, depending on the time period. The cross-sectional variance has recently increased but this reflects a rise in the variance of the permanent component, not the transitory component. Increases in transitory variance occurred for less educated in the early 1980s and for more educated workers in the later 1980s and early 1990s.