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Sources of Inequality in Earnings Growth Over the Life Cycle

Author

Listed:
  • Fatih Karahan

    (Federal Reserve Bank of New York)

  • Jae Song

    (Social Security Administration)

  • Serdar Ozkan

    (University of Toronto)

Abstract
Individuals that rank at the top of the lifetime earnings (LE) distribution experience almost an 8-fold increase in their annual earnings between age 30 and 55, whereas median earners only see a 50% increase. If all workers have had experienced the same earnings growth, the difference in LE between the top and the 10th percentiles of LE distribution would be 85% smaller. What explains the vast heterogeneity in lifetime earnings growth? We study both empirically and theoretically the career paths across the LE distribution. Using administrative data, we document large dispersion in job switching patterns, inci- dence of unemployment, and wage growth for stayers and switchers across the LE distri- bution. To interpret these facts, we estimate a job-ladder model featuring heterogeneity in unemployment risk, job finding rate and contact rate for employed workers, as well as returns to experience. The estimated model matches a rich set of facts including the dispersion in the career paths over the LE distribution, as well as the distribution of annual earnings changes. We use the estimated model to decompose lifetime earnings growth differences into i) ex-ante heterogeneity in unemployment risk, and offer arrival rate both on and off the job, ii) returns to experience, and iii) ex-post idiosyncratic risk.

Suggested Citation

  • Fatih Karahan & Jae Song & Serdar Ozkan, 2018. "Sources of Inequality in Earnings Growth Over the Life Cycle," 2018 Meeting Papers 313, Society for Economic Dynamics.
    • Handle: RePEc:red:sed018:313
    as

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    References listed on IDEAS

    as
    1. Pierre Cahuc & Fabien Postel-Vinay & Jean-Marc Robin, 2006. "Wage Bargaining with On-the-Job Search: Theory and Evidence," Econometrica, Econometric Society, vol. 74(2), pages 323-364, March.
    2. repec:hal:spmain:info:hdl:2441/dc0ckec3fcb29ms9850c12h1p is not listed on IDEAS
    3. Mark Huggett & Gustavo Ventura & Amir Yaron, 2011. "Sources of Lifetime Inequality," American Economic Review, American Economic Association, vol. 101(7), pages 2923-2954, December.
    4. Jesper Bagger & Francois Fontaine & Fabien Postel-Vinay & Jean-Marc Robin, 2014. "Tenure, Experience, Human Capital, and Wages," SciencePo Working papers Main hal-01301431, HAL.
    5. Jesper Bagger & Fran?ois Fontaine & Fabien Postel-Vinay & Jean-Marc Robin, 2014. "Tenure, Experience, Human Capital, and Wages: A Tractable Equilibrium Search Model of Wage Dynamics," American Economic Review, American Economic Association, vol. 104(6), pages 1551-1596, June.
    6. Serdar Ozkan & Jae Song & Fatih Karahan & Fatih Guvenen, 2013. "What Do Data on Millions of U.S. Workers Say About Labor Income Risk?," 2013 Meeting Papers 1271, Society for Economic Dynamics.
    7. repec:hal:spmain:info:hdl:2441/7rep5mp5ij95l94ec64n5tdclp is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Joachim Hubmer, 2018. "The Job Ladder and its Implications for Earnings Risk," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 29, pages 172-194, July.
    2. Fatih Guvenen & Fatih Karahan & Serdar Ozkan & Jae Song, 2017. "Heterogeneous Scarring Effects of Full-Year Nonemployment," American Economic Review, American Economic Association, vol. 107(5), pages 369-373, May.

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