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The Evolution of Inequality, Heterogeneity and Uncertainty in Labor Earnings in the U.S. Economy

Author

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  • Cunha, Flavio

    () (University of Pennsylvania)

  • Heckman, James J.

    () (University of Chicago)

Abstract

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.

Suggested Citation

  • Cunha, Flavio & Heckman, James J., 2007. "The Evolution of Inequality, Heterogeneity and Uncertainty in Labor Earnings in the U.S. Economy," IZA Discussion Papers 3115, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp3115
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    References listed on IDEAS

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    Cited by:

    1. Jonas D. M. Fisher & Martin Gervais, 2011. "Why Has Home Ownership Fallen Among The Young?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(3), pages 883-912, August.
    2. Heckman, James J. & UrzĂșa, Sergio, 2010. "Comparing IV with structural models: What simple IV can and cannot identify," Journal of Econometrics, Elsevier, vol. 156(1), pages 27-37, May.
    3. Athreya, Kartik & Tam, Xuan S. & Young, Eric R., 2009. "Unsecured credit markets are not insurance markets," Journal of Monetary Economics, Elsevier, vol. 56(1), pages 83-103, January.
    4. Borra, Cristina & Iacovou, Maria & Sevilla, Almudena, 2012. "The effect of breastfeeding on children's cognitive and noncognitive development," Labour Economics, Elsevier, vol. 19(4), pages 496-515.
    5. Gervais, Martin & Fisher, Jonas, 2009. "Why has home ownership fallen among the young?," Discussion Paper Series In Economics And Econometrics 0907, Economics Division, School of Social Sciences, University of Southampton.
    6. Jeffrey Brown & Chichun Fang & Francisco Gomes, 2012. "Risk and Returns to Education," NBER Working Papers 18300, National Bureau of Economic Research, Inc.
    7. Steven J. Davis & James A. Kahn, 2008. "Interpreting the Great Moderation: Changes in the Volatility of Economic Activity at the Macro and Micro Levels," Journal of Economic Perspectives, American Economic Association, vol. 22(4), pages 155-180, Fall.
    8. Brown, Jeffrey R. & Fang, Chichun & Gomes, Francisco, 2015. "Risks and returns to education over time," CFS Working Paper Series 512, Center for Financial Studies (CFS).
    9. Theloudis, Alexandros, 2011. "From income and consumption inequality to economic welfare inequality: the role of labor supply," MPRA Paper 37517, University Library of Munich, Germany.
    10. Steven J. Davis & James A. Kahn, 2007. "Macroeconomic implications of changes in micro volatility," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.

    More about this item

    Keywords

    wage inequality; uncertainty; sorting; inequality accounting;

    JEL classification:

    • D3 - Microeconomics - - Distribution
    • J8 - Labor and Demographic Economics - - Labor Standards

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