Growth-Rate Heterogeneity and the Covariance Structure of Life-Cycle Earnings

Abstract

Using U.S. panel data on adult males, the author compares the 'profile heterogeneity model' of earnings dynamics, in which the earnings-experience profile varies across individuals, to a competing model in which earnings 'has a unit root.' The latter specification enjoys increasing popularity among researchers. The author's analysis questions this favor, suggesting the profile heterogeneity model provides a more consistent representation of the data. He also provides new estimates of the variation in earnings growth rates. Previous evidence is from relatively unrepresentative samples. Individuals one standard deviation above the mean enjoy a 20-30 percent earnings advantage in just ten years. Copyright 1997 by University of Chicago Press.