Trends in the covariance structure of earnings in the U.S.: 1969�C1987

We examine the increasing variance of earnings of white men over the 1970s and 1980s by focusing on changes in the covariance structure of earnings. Using data from the Michigan PSID from 1969–1987, we find that about half of the increase has arisen from an increase in the variance of the permanent component of earnings and half from an increase in the variance of the transitory component, where the transitory component is composed of serially correlated shocks that die out within 3 years. We thus find that increases in the variability of earnings are of equal importance to increases in the dispersion of permanent earnings in explaining recent increases in earnings inequality.     

JOB MOBILITY AND EARNINGS INSTABILITY

There is still no consensus on the causes of the increase in the variance of transitory earnings (earnings instability) in the United States. It is difficult to attribute the rise in instability to job mobility because there is no evidence of a concurrent increase in job turnover or separations. Using an error component model of the covariance structure of earnings on Panel Survey of Income Dynamics and Survey of Income and Program Participation data, this study shows that job mobility and the increase in the variance of wage changes upon job change accounts for a substantial part of the increase in earnings instability. The empirical evidence is consistent with the simulations of a search and matching model where an increase in the variance of productivity shocks increases on‐the‐job search and earnings instability among job changers while leaving job turnover approximately constant. (JEL J21, J31)     

DECOMPOSING TRENDS IN INCOME VOLATILITY: THE “WILD RIDE” AT THE TOP AND BOTTOM

We use 2‐year panels from the Current Population Survey to provide a detailed accounting of family income volatility from 1980 to 2009. Volatility doubled overall, and the increase was most pronounced among the top 1% of the income distribution, but in any given year the level of volatility among the bottom 10% exceeds that of the top. The increased volatility comes from higher instability of head and spouse earnings, other nonlabor income, and from reduced covariance between these income sources with the tax system. This suggests that current tax policy is less effective in mitigating income shocks than previous decades. (JEL J31, I30)     

Biases of the ordinary least squares and instrumental variables estimators of the intergenerational earnings elasticity: Revisited in the light of panel data

The OLS estimator of the intergenerational earnings correlation is biased towards zero, while the instrumental variables estimator is biased upwards. The first of these results arises because of measurement error, while the latter rests on the presumption that the education of the parent family is an invalid instrument. We propose a panel data framework for quantifying the asymptotic biases of these estimators, as well as a mis-specification test for the IV estimator. An erratum to this article can be found at     

Dynamics of earnings inequality among female-headed households in the United States

The labor market in the United States has gone through a number of noticeable changes, one of which is a rise participation of women in the labor force. A number of studies have investigated the consequences of these changes on wage, income, or earnings inequality in a static framework. This study investigated the consequences of these changes on earnings inequality over time. The earnings inequality among male- and female-headed households is compared. I further considered the factors that might have influenced the earnings inequality among female-headed households. Short-term and long-term inequality was measured from 1978–1986. It was found that short-term inequalities generally have a rising trend and contain transitory components; long-term inequalities declined in the early years because of a smoothing of transitory components; and within-group inequalities are the principle determinant of overall inequality. Education, race, age, and marital status were considered as possible contributors to the overall inequality. Education and race were shown to be the most influential factor explaining inequality among female-headed households and explained a third of the observed inequality. Earnings stability profiles reveal the existence of permanent and chronic inequality.     

Trade Balance and Income Shocks: Experience of Transition Economies

This paper investigates the major sources of changes in the trade balance of four Central European and three Baltic transition economies with an emphasis on the difference between permanent and transitory disturbances to income. In all seven countries the findings support the hypothesis that transitory disturbances to income are the main determinants of changes in the trade balance. These results seem to be fairly consistent with inter-temporal models of trade balance, which view transitory shocks to income as the main source of variations in the trade balance. These results do not seem to support the view that productivity shocks alone generate most of the variation in the trade balance.      

The effect of income shocks on food insufficiency

In this paper we investigate the relationship between income shocks and food insufficiency for U.S. households. Using Survey of Income and Program Participation data on U.S. households, we test the importance of both stable and transitory income components in determining food insufficiency. In a logistic regression model, we find that both the level of income and negative income shocks affect the predicted probability of food insufficiency, while positive income shocks do not. Although we do not have a definitive measure of a household’s liquidity constraint status, our work suggests that negative shocks may matter more for households that face liquidity constraints. Understanding the role of income shocks in determining food insufficiency is especially important in light of recent policy changes. It is likely that welfare reform in the U.S. increased the volatility of income in the low-income population. Our findings here suggest that this increase in volatility may not be without consequence.     

Job turnover, wage rates, and marital stability: How are they related?

This study examines the interplay between job stability, wage rates, and marital stability. We use a Dynamic Selection Control model in which young men make sequential choices about work and family and estimate the model using an approach that takes account of self-selection, simultaneity and unobserved heterogeneity. The results quantify how job stability affects wage rates, how both affect marital status, and how marital status affects earnings and job stability. The study reveals robust evidence that job changes lower wages and the likelihood of getting married and remaining married. At the same time, marriage raises wage rates and job stability. To project the sequential effects linking job change, marital status, and earnings, we simulate the impacts of shocks that raise preferences for marriage and that increase education. Feedback effects cause the simulated wage gains from marriage to cumulate over time, indicating that long-run marriage wage premiums exceed conventional short-run estimates.     

How do changes in income,employment and health insurance affect family mental health spending?

Using eight two-year panels from the Medical Expenditure Panel Survey data for the period 2004 to 2012, we examine the effect of economic shocks on mental health spending by families with children. Estimating two-part expenditure models within the correlated random effects framework, we find that employment shocks have a greater impact on mental health spending than do income or health insurance shocks. Our estimates reveal that employment gains are associated with a lower likelihood of family mental health services utilization. By contrast employment losses are positively related to an increase in total family mental health. We do not detect a link between economic shocks and mental health spending on behalf of fathers.

     

THE SOLOW RESIDUAL FOR AUSTRALIA: TECHNOLOGY SHOCKS OR FACTOR UTILIZATION?

This paper presents evidence which implies that fluctuations in the Solow residual for Australia do not solely reflect technology shocks. Recent work suggests that the Solow residual is a noisy measure of technology shocks. One source of noise in the standard measure of the Solow residual is changes in factor utilization. In this paper a structural vector autoregression model for capacity utilization and the Solow residual is estimated. A transitory shock is identified that accounts, for about 30% of the short term variation in the Solow residual and virtually 100% of the variation in capacity utilization at all horizons. ( JEL E3, E32, O4)     

Is automatic enrollment consistent with a life cycle model?

We examine retirement saving for young adults in a life cycle model. We find that optimal retirement saving is zero for liquidity-constrained young adults who anticipate significant earnings growth. With a plausible age-earnings profile for college-educated workers, retirement saving does not begin until the late 30s or early 40s. Workers facing a flat earnings profile begin saving much sooner. Participating may be optimal for younger workers facing steep earnings profiles if they anticipate switching jobs and cashing out after 1–2 years. Our results suggest that automatically enrolling workers, regardless of age, is not consistent with a life cycle model.     

THE EFFECTS OF JOB RELOCATION ON SPOUSAL CAREERS: EVIDENCE FROM MILITARY CHANGE OF STATION MOVES

We investigate the impact of military job relocation on spousal earnings and employment by creating a unique longitudinal database that tracks over 900,000 military spouses over the period 2001–2012, based on data from two administrative sources—military records on personnel and their dependents, and Social Security earnings records. This database allows us to estimate the effects of military change of station moves controlling for some key observable characteristics of the service‐member and household and controlling for individual spouse fixed effects. We find that military moves cause a substantial decline in spousal earnings in the year of the move, on the order of $2,100, or 14% of average spousal earnings. Moves also increase the likelihood that the spouse has no earnings for the year. We find larger earnings reductions for moves that cross state lines, and for older spouses, male spouses, and those with young children. The career costs persist over time and spouses continue to experience significantly lower earnings 2 years after the move. This persistence, combined with the typical military member experiencing a change of station move every 2 or 3 years, may substantially limit the ability of military spouses to accumulate human capital over time. (JEL H56, R23, J45, J16, J64)     

Low-skilled immigrant entrepreneurship

More than ? of the foreign born workforce in the US have no schooling beyond high school and about 20% of the low-skilled workforce are immigrants. More than 10% of these low-skilled immigrants are self-employed. Utilizing longitudinal data from the 1996, 2001 and 2004 Survey of Income and Program Participation panels, this paper analyzes the returns to self-employment among low-skilled immigrants. We find that the returns to low-skilled self-employment among immigrants is higher than it is among natives but also that wage/salary employment is a more financially rewarding option for most low-skilled immigrants. In analyses of earnings differences, we find that most of the 20% male native-immigrant earnings gap among low-skilled business owners can be explained primarily by differences in the ethnic composition. Low-skilled female foreign born entrepreneurs are found to have earnings roughly equal to otherwise observationally similar self-employed native born women.     

CONSUMPTION,SENTIMENT, AND ECONOMIC NEWS

This paper investigates the influence of economic news on consumer sentiment, and examines whether “news shocks”—changes in coverage that would not be expected from incoming data on economic fundamentals—have aggregate effects. Using monthly U.S. data and a structural vector autoregression, I find that (1) sentiment is affected by news shocks; (2) after filtering out effects of news shocks, shocks to sentiment still have positive effects on consumer spending; and (3) news shocks influence both spending and unemployment in significant, though transitory ways. These results are consistent with other evidence of a role of nonfundamental factors in aggregate fluctuations. (JEL E21, E32, D12)     

THE SWINGS OF U.S. INFLATION AND THE GIBSON PARADOX

In recent business cycles, U.S. inflation has experienced a reduction of volatility and a severe weakening in the correlation to the nominal interest rate (Gibson paradox). We examine these facts in an estimated dynamic stochastic general equilibrium model with money. Our findings point at a flatter New Keynesian Phillips Curve (higher price stickiness) and a lower persistence of markup shocks as the main explanatory factors. In addition, a higher interest‐rate elasticity of money demand, an increasing role of demand‐side shocks, and a less systematic behavior of Fed's monetary policy also account for the recent patterns of U.S. inflation dynamics. (JEL E32, E47)     

Long-term employment and earnings among low-income families with children

Self-support through employment has become much more important for low-income mothers and welfare recipients as a result of welfare reform and decline of welfare caseloads. This study used the 2004 longitudinal panels of the Survey of Income and Program Participation (SIPP) to examine longitudinal patterns and trajectories of employment and earnings and to identify factors associated with long-term employment and earnings success among low-income mothers. The results indicate that despite the high proportion of low-income mothers employed, a substantial number were unable to sustain employment and had low earnings. Only 37% of low-income mothers experienced earnings success. Moreover, nearly half of the sample who had successful employment trajectories experienced stagnant or decreasing earnings. Results highlight the importance of considering the level, trend, and stability of employment and earnings in categorizing employment and earnings success. The factors associated with both long-term employment and earnings success included education, work disability, earnings of other adults in the family, homeownership, and state unemployment rates. Results also revealed some differences in factors that determined these two outcomes. The findings point to the importance of advocating for social policies that provide additional income and employment supports for low-income families with children.     

Sorting or Shaping? The Gendered Economic Outcomes of Immigration Policy in Canada

Using a growth model analysis of Canada's Longitudinal Survey of Immigrants to Canada (LSIC), we establish a significant relationship between application status — i.e., the distinction in immigration policy between primary and secondary migrants — and individual wages. This relationship is associated with an earnings disadvantage for secondary migrants, who are disproportionately female. The disadvantage persists over time, even when individual human capital and personal characteristics, household context, and pre‐existing differences in the relative employability of spouses are taken into account. We outline some possible explanations for this effect, as well as implications for immigration policy makers.     

FINANCIAL INNOVATION, PRICE SMOOTHING, AND MONETARY POLICY

This paper examines an unregulated transaction services market that is subject to financial innovation in an economy that experiences aggregate supply and demand shocks. The availability of this unregulated market to transactors smooths the price response to these shocks. However, financial innovations act as money supply shocks that increase price disturbances. If there is persistence in the real aggregate supply shocks and in the rate of adoption of financial innovations, then the central bank can forecast some portion of the changes in transaction requirements that accompany these shocks and damp the residual variation in prices by accommodating these anticipated needs.     

AN EMPIRICAL CHARACTERIZATION OF THE DYNAMIC EFFECTS OF POLICE SPENDING ON VIOLENT AND PROPERTY CRIME

The study estimates the dynamic effects of shocks to police expenditures on measures of violent and property crime rates using annual U.S. state-level data for the period 1960–2015. We employ a structural panel VAR model and achieve identification by imposing the restriction that police spending responds to structural shocks to crime with at least a lag of 1 year. Results indicate that a shock to police spending leads to (a) persistent and significant decreases in violent and property crime rates and (b) significant and persistent negative impacts on crime rates in periods of high crime but little impacts in periods of low crime. Variance decompositions show that shocks to police spending account for moderate to large proportions of the variability of U.S. state-level crime rates. Our findings are robust across separate measures of violent and property crime rates, as well as to the inclusion of additional variables to the baseline panel VAR model. (JEL K42)     

Socioeconomic Indexes for Occupations: A Review, Update, and Critique

Following a review of the history and sources of socioeconomic indexes for occupations, we estimate a new set of indexes for 1990 Census occupation lines, based on relationships between the prestige ratings obtained by Nakao and Treas in the 1989 General Social Survey and characteristics of occupational incumbents in the 1990 Census. We also investigate theoretical and empirical relationships among socioeconomic and prestige indexes, using data from the 1994 General Social Survey. Many common occupations, especially those held by women, do not fit the typical relationships among prestige, education, and earnings. The fit between prestige and socioeconomic characteristics of occupations can be improved by statistical transformation of the variables. However, in rudimentary models of occupational stratification, prestige-validated socioeconomic indexes are of limited value. They give too much weight to occupational earnings, and they ignore intergenerational relationships between occupational education and occupational earnings. Levels of occupational education appear to define the main dimension of occupational persistence across and within generations. We conclude that composite indexes of occupational socioeconomic status are scientifically obsolete.