Working Paper: NBER ID: w7370
Authors: Michael Baker; Gary Solon
Abstract: Several recent studies have found that earnings inequality in Canada has grown considerably since the late 1970's. Using an extraordinary data base drawn from longitudinal income tax records, we decompose this growth in earnings inequality into its persistent and transitory components. We find that the growth in earnings inequality reflects both an increase in long-run inequality and an increase in earnings instability. The large size of our earnings panel allows us to estimate and test richer models of earnings dynamics than could be supported by the relatively small panel surveys used in U.S. research. The Canadian data strongly reject several restrictions commonly imposed in the U.S. literature, and they also suggest that imposing these evidently false restrictions may lead to distorted inferences about earnings dynamics and inequality trends.
Keywords: earnings dynamics; inequality; Canada; longitudinal data
JEL Codes: F2; H73; Q2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| growth in earnings inequality in Canada (O51) | increase in long-run inequality (F62) |
| growth in earnings inequality in Canada (O51) | increase in earnings instability (J31) |
| increase in earnings instability (J31) | welfare costs for individuals (D69) |
| increase in earnings instability (J31) | affect consumption patterns for liquidity-constrained individuals (D12) |
| education (I29) | earnings inequality (D31) |
| persistent factors (C41) | earnings inequality (D31) |
| transitory fluctuations (E32) | earnings inequality (D31) |