Earnings Instability and Earnings Inequality

It has been well-documented that economic inequality has increased since the 1970s. The rise in income inequality is characterized by several different trends; these include an overall widening of the wage distribution during the 1980s, rising wage polarization since the early 1990s, and a substantial increase in the earnings share of the top 1%. Earnings have also become more unstable since the 1970s. The broad consensus in the literature is that the widening distribution of permanent earnings and the increase in transitory earnings instability that have occurred over the past four decades have contributed to rising economic inequality. Professors Michael Carr and Emily Wiemers at the University of Massachusetts, Boston suggest that despite the explicit link between earnings instability and earnings inequality, we still know little about how transitory earnings instability or year-to-year earnings volatility has changed over time and across the distribution of permanent earnings. Carr and Wiemers attribute this deficit of knowledge about the links between earnings instability and inequality to data limitations. They indicate that the data most often used to examine earnings inequality, the Current Population Survey (CPS), does not have long panels on earnings, and the Panel Study of Income Dynamics (PSID), often used to examine earnings dynamics and which does have long panels, does not have sufficiently sized samples.

To address this deficit, Carr and Wiemers will bring new questions, new data, and new techniques to the analysis of earnings variability. There are three questions at the heart of their proposed project. How do trends in year-to-year earnings volatility vary across the distribution of permanent earnings? What are the relative contributions of changes in the variance of the permanent and transitory component of earnings to the trends in earnings variability across the earnings distribution? And what can the data tell us about the trends in transitory earnings instability and year-to-year earnings volatility over time?