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

Adriaan Kalwij and Rob Alessie

No 686, IZA Discussion Papers from Institute of Labor Economics (IZA)

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: mobility; wage distribution; panel data; inequality (search for similar items in EconPapers)
JEL-codes: C23 D31 J31 J60 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2003-01
New Economics Papers: this item is included in nep-eec, nep-his and nep-pke
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Published - published in: Journal of Applied Econometrics, 2007, 22 (6), 1063 - 1093

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Working Paper: Permanent and Transitory Wage Inequality of British Men, 1975-2001: Year, Age and Cohort Effects (2003)
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