Report

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

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 mixtures;

JEL Classification: E24; J24; J31;

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2015-02-01

Number: 710

Note: Revised September 2019. Previous title: "What Do Data on Millions of U.S. Workers Reveal about Life-Cycle Earnings Risk?"