Dynamic Aspects of Earnings Mobility
Lee A. Lillard, Robert J. Willis
NBER Working Paper No. 150
This paper proposes an econometric methodology to deal with life cycle earnings and mobility among discrete earnings classes. First, we use panel data on male log earnings to estimate an earnings function with permanent and serially correlated transitory components due to both measured and unmeasured variables. Assuming that the error components are normally distributed, we develop statements for the probability that an individual's earnings will fall into a particular but arbitrary time sequence of poverty states. Using these statements, we illustrate the implications of our earnings model for poverty dynamics and compare our approach to Markov chain models of income mobility.
Published: Econometrica, Vol. 46, no. 5 (1978): 985-1012.