Wages and hours in earnings dynamics

by Lee A. Lillard

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Explores the relative importance of wages, hours worked, and labor supply in earning inequality and earning mobility using a model of earnings dynamics. The model emphasizes permanent and transitory sources of each. The model is dynamic in that the wage function and the labor supply (hours worked) function each incorporate a permanent component partially due to observed worker characteristics, an autoregressive transitory component and a serially uncorrelated component. The estimated relationships also account for measurement error. The results indicate that (1) labor supply plays a relatively minor role in either earning inequality or earning mobility, (2) wage variation dominates earnings inequality, especially permanent inequality, and (3) earning mobility, or instability, is largely nonwage related.

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