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


  • Kalwij, Adriaan

    () (Utrecht School of Economics)

  • Alessie, Rob

    () (University of Groningen)


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.

Suggested Citation

  • Kalwij, Adriaan & Alessie, Rob, 2003. "Permanent and Transitory Wage Inequality of British Men, 1975-2001: Year, Age and Cohort Effects," IZA Discussion Papers 686, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp686

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    References listed on IDEAS

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    Cited by:

    1. SOLOGON Denisa & O'DONOGHUE Cathal, 2010. "Earnings dynamics and inequality in the EU, 1994-2001," LISER Working Paper Series 2010-34, LISER.
    2. 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).
    3. Denisa Maria Sologon & O'Donoghue, Cathal, 2011. "Shaping earnings instability: labour market policy and institutional factors," MERIT Working Papers 077, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    4. Lorenzo Cappellari & Marco Leonardi, 2016. "Earnings Instability and Tenure," Scandinavian Journal of Economics, Wiley Blackwell, vol. 118(2), pages 202-234, April.
    5. 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.
    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.

    More about this item


    mobility; wage distribution; panel data; inequality;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General

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