Anatomy of Lifetime Earnings Inequality: Heterogeneity in Job Ladder Risk vs. Human Capital

71 Pages Posted: 2 Jan 2020

See all articles by Fatih Karahan

Fatih Karahan

Federal Reserve Bank of New York

Serdar Ozkan

University of Toronto

Jae Song

Government of the United States of America - Social Security Administration

Date Written: December 2019

Abstract

We study the determinants of lifetime earnings (LE) inequality in the United States, for which differences in lifetime earnings growth are key. Using administrative data and focusing on the roles of job ladder dynamics and on-the-job learning, we document that:

1) lower LE workers change jobs more often, mainly driven by higher non-employment;

2) earnings growth for job stayers is similar at around 2 percent in the bottom two-thirds of the LE distribution, whereas for job switchers it rises with LE; and

3) top LE workers enjoy high earnings growth regardless of job switching.

We estimate a job ladder model with on-the-job learning featuring ex ante heterogeneity in learning ability and job ladder riskā€”job loss, job finding, and contact rates. We find that learning ability differences explain almost all earnings growth heterogeneity above the median, whereas ex ante heterogeneity in job ladder risk accounts for 80 percent of LE growth differences below the median.

Keywords: job ladder, inequality, Pareto tails

JEL Classification: E24, J24, J31

Suggested Citation

Karahan, Fatih and Ozkan, Serdar and Song, Jae, Anatomy of Lifetime Earnings Inequality: Heterogeneity in Job Ladder Risk vs. Human Capital (December 2019). FRB of New York Staff Report No. 908, December 2019. Available at SSRN: https://ssrn.com/abstract=3511647 or http://dx.doi.org/10.2139/ssrn.3511647

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

Government of the United States of America - Social Security Administration

Washington, DC 20254
United States

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