The Evolution of Inequality, Heterogeneity and Uncertainty in Labor Earnings in the U.S. Economy
A large empirical literature documents a rise in wage inequality in the American economy. It is silent on whether the increase in inequality is due to greater heterogeneity in the components of earnings that are predictable by agents or whether it is due to greater uncertainty faced by agents. Applying the methodology of Cunha, Heckman, and Navarro (2005) to data on agents making schooling decisions in different economic environments, we join choice data with earnings data to estimate the fraction of future earnings that is forecastable and how this fraction has changed over time. We find that both predictable and unpredictable components of earnings have increased in recent years. The increase in uncertainty is substantially greater for unskilled workers. For less skilled workers, roughly 60% of the increase in wage variability is due to uncertainty. For more skilled workers, only 8% of the increase in wage variability is due to uncertainty. Roughly 26% of the increase in the variance of returns to schooling is due to increased uncertainty. Using conventional measures of income inequality masks the contribution of rising uncertainty to the rise in the inequality of earnings for less educated groups.
|Date of creation:||Oct 2007|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +49 228 3894 223
Fax: +49 228 3894 180
Web page: http://www.iza.org
|Order Information:|| Postal: IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Carneiro, Pedro & Hansen, Karsten & Heckman, James, 2003.
"Estimating distributions of treatment effects with an application to the returns to schooling and measurement of the effects of uncertainty on college choice,"
Working Paper Series
2003:9, IFAU - Institute for Evaluation of Labour Market and Education Policy.
- Carneiro, Pedro & Hansen, Karsten T. & Heckman, James J., 2003. "Estimating Distributions of Treatment Effects with an Application to the Returns to Schooling and Measurement of the Effects of Uncertainty on College Choice," IZA Discussion Papers 767, Institute for the Study of Labor (IZA).
- Lars Ljungqvist & Thomas J. Sargent, 2004.
"European Unemployment and Turbulence Revisited in a Matching Model,"
Journal of the European Economic Association,
MIT Press, vol. 2(2-3), pages 456-468, 04/05.
- Ljungqvist, Lars & Sargent, Thomas J, 2004. "European Unemployment and Turbulence Revisited in a Matching Model," CEPR Discussion Papers 4183, C.E.P.R. Discussion Papers.
- James J. Heckman & Paul A. LaFontaine, 2007.
"The American High School Graduation Rate: Trends and Levels,"
NBER Working Papers
13670, National Bureau of Economic Research, Inc.
- James J. Heckman & Paul A. LaFontaine, 2010. "The American High School Graduation Rate: Trends and Levels," The Review of Economics and Statistics, MIT Press, vol. 92(2), pages 244-262, May.
- Heckman, James J. & LaFontaine, Paul A., 2007. "The American High School Graduation Rate: Trends and Levels," IZA Discussion Papers 3216, Institute for the Study of Labor (IZA).
- James J. Heckman & Paul A. LaFontaine, 2008. "The American High School Graduation Rate: Trends And Levels," Working Papers 200828, Geary Institute, University College Dublin.
- 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.
- Blundell, Richard William & Pistaferri, Luigi & Preston, Ian, 2002.
"Partial Insurance, Information, and Consumption Dynamics,"
CEPR Discussion Papers
3666, C.E.P.R. Discussion Papers.
- Richard Blundell & Luigi Pistaferri & Ian Preston, 2002. "Partial insurance, information and consumption dynamics," IFS Working Papers W02/16, Institute for Fiscal Studies.
- Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 974-1009, October.
- Susanne M. Schennach, 2004. "Estimation of Nonlinear Models with Measurement Error," Econometrica, Econometric Society, vol. 72(1), pages 33-75, 01.
- MaCurdy, Thomas, 2007. "A Practitioner's Approach to Estimating Intertemporal Relationships Using Longitudinal Data: Lessons from Applications in Wage Dynamics," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 6, chapter 62 Elsevier.
- Sen, Amartya, 2000. "Social justice and the distribution of income," Handbook of Income Distribution, in: A.B. Atkinson & F. Bourguignon (ed.), Handbook of Income Distribution, edition 1, volume 1, chapter 1, pages 59-85 Elsevier.
- Abbring, Jaap H. & Heckman, James J., 2007. "Econometric Evaluation of Social Programs, Part III: Distributional Treatment Effects, Dynamic Treatment Effects, Dynamic Discrete Choice, and General Equilibrium Policy Evaluation," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 6, chapter 72 Elsevier.
- Milton Friedman & Simon Kuznets, 1954. "Income from Independent Professional Practice," NBER Books, National Bureau of Economic Research, Inc, number frie54-1, 07.
- Richard Blundell & Ian Preston, 1997.
"Consumption, inequality and income uncertainty,"
IFS Working Papers
W97/15, Institute for Fiscal Studies.
- Pedro Carneiro & Karsten T. Hansen & James J. Heckman, 2003. "Estimating Distributions of Treatment Effects with an Application to the Returns to Schooling and Measurement of the Effects of Uncertainty on College," NBER Working Papers 9546, National Bureau of Economic Research, Inc.
- Matzkin, Rosa L, 1992. "Nonparametric and Distribution-Free Estimation of the Binary Threshold Crossing and the Binary Choice Models," Econometrica, Econometric Society, vol. 60(2), pages 239-70, March.
When requesting a correction, please mention this item's handle: RePEc:iza:izadps:dp3115. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark Fallak)
If references are entirely missing, you can add them using this form.