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

44 Pages Posted: 25 Feb 2003

See all articles by Adriaan Kalwij

Adriaan Kalwij

IZA Institute of Labor Economics

Rob Alessie

Utrecht University - School of Economics; VU University Amsterdam - Department of Economics

Date Written: January 2003

Abstract

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.

Keywords: Panel Data, Wage Distribution, Inequality, Mobility

JEL Classification: C23, D31, J31, J60

Suggested Citation

Kalwij, Adriaan S. and Alessie, R.J.M. (Rob), Permanent and Transitory Wage Inequality of British Men, 1975-2001: Year, Age and Cohort Effects (January 2003). IZA Discussion Paper No. 686. Available at SSRN: https://ssrn.com/abstract=382780

Adriaan S. Kalwij (Contact Author)

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

R.J.M. (Rob) Alessie

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, 3584 EC
Netherlands
31 30 253 9814 (Phone)
31 30 253 7373 (Fax)

HOME PAGE: http://www2.econ.uu.nl/users/alessie/

VU University Amsterdam - Department of Economics ( email )

De Boelelaan 1105
1081 HV Amsterdam
Netherlands
+31 20 444 6047 (Phone)
+31 20 444 6005 (Fax)

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