An empirical analysis of earnings dynamics among men in the PSID: 1968-1989

This study uses data from the Panel Survey of Income Dynamics (PSID) to address a number of questions about life cycle earnings mobility. It develops a dynamic reduced form model of earnings and marital status that is nonstationary over the life cycle. The study reaches several firm conclusions about life cycle earnings mobility. Incorporating non-Gaussian shocks makes it possible to better account for transitions between low and higher earnings states, a heretofore unresolved problem. The non-Gaussian distribution substantially increases estimates of the lifetime return to post-secondary education, and substantially reduces differences in lifetime earnings attributable to race. In a given year, the majority of variance in earnings not accounted for by race, education and age is due to transitory shocks, but over a lifetime the majority is due to unobserved individual heterogeneity. Consequently, low earnings at early ages are strong predictors of low earnings later in life, even conditioning on observed individual characteristics. (C) 2000 Elsevier Science S.A. All rights reserved.