What Do Data on Millions of U.S. Workers Reveal About Life-Cycle Earnings Dynamics?

89 Pages Posted: 11 Feb 2015 Last revised: 3 Oct 2019

See all articles by Fatih Guvenen

Fatih Guvenen

University of Minnesota - Department of Economics; National Bureau of Economic Research (NBER)

Fatih Karahan

Federal Reserve Bank of New York

Serdar Ozkan

University of Toronto

Jae Song

U.S. Social Security Administration

Multiple version iconThere are 3 versions of this paper

Date Written: February 1, 2015

Abstract

We study individual earnings dynamics over the life cycle using panel data on millions of U.S. workers. Using nonparametric methods, we first show that the distribution of earnings changes exhibits substantial deviations from lognormality, such as negative skewness and very high kurtosis. Further, the extent of these nonnormalities varies significantly with age and earnings level, peaking around age 50 and between the 70th and 90th percentiles of the earnings distribution. Second, we estimate nonparametric impulse response functions and find important asymmetries: positive changes for high-income individuals are quite transitory, whereas negative ones are very persistent; the opposite is true for low-income individuals. Third, we turn to long-run outcomes and find substantial heterogeneity in the cumulative growth rates of earnings and total years individuals spend nonemployed between ages 25 and 55. Finally, by targeting these rich sets of moments, we estimate stochastic processes for earnings that range from the simple to the complex. Our preferred specification features normal mixture innovations to both persistent and transitory components and includes long-term nonemployment shocks with a realization probability that varies with age and earnings.

Keywords: earnings dynamics, higher-order earnings risk, kurtosis, skewness, non-Gaussian shocks, normal mixture

JEL Classification: E24, J24, J31

Suggested Citation

Guvenen, Fatih and Karahan, Fatih and Ozkan, Serdar and Song, Jae, What Do Data on Millions of U.S. Workers Reveal About Life-Cycle Earnings Dynamics? (February 1, 2015). FRB of New York Staff Report No. 710. Available at SSRN: https://ssrn.com/abstract=2563279 or http://dx.doi.org/10.2139/ssrn.2563279

Fatih Guvenen

University of Minnesota - Department of Economics ( email )

Minneapolis, MN 55455
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Fatih Karahan (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Serdar Ozkan

University of Toronto ( email )

Toronto, Ontario M5S 3G8
Canada

Jae Song

U.S. Social Security Administration ( email )

Washington, DC 20254
United States
202-358-6403 (Phone)
202-358-6192 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
35
Abstract Views
708
PlumX Metrics