TY  - JOUR
AU  - Cunha,Flavio
AU  - Heckman,James J.
TI  - The Evolution of Inequality, Heterogeneity and Uncertainty in Labor Earnings in the U.S. Economy
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13526
PY  - 2007
Y2  - October 2007
UR  - http://www.nber.org/papers/w13526
L1  - http://www.nber.org/papers/w13526.pdf
N1  - Author contact info:
Flavio Cunha
Department of Economics
University of Pennsylvania
160 McNeil Building
3718 Locust Walk
Philadelphia, PA 19104-6297
Tel: 215/898-5652
E-Mail: fcunha@sas.upenn.edu

James J. Heckman
Department of Economics
The University of Chicago
1126 E. 59th Street
Chicago, IL 60637
Tel: 773/702-0634
Fax: 773/702-8490
E-Mail: jjh@uchicago.edu
AB  - A large empirical literature documents a rise in wage inequality in the American economy. It is silent on whether the increase in inequality is due to greater heterogeneity in the components of earnings that are predictable by agents or whether it is due to greater uncertainty faced by agents. Applying the methodology of Cunha, Heckman and Navarro (2005) to data on agents making schooling decisions in different economic environments, we join choice data with earnings data to estimate the fraction of future earnings that is forecastable and how this fraction has changed over time. We find that both predictable and unpredictable components of earnings have increased in recent years. The increase in uncertainty is substantially greater for unskilled workers. For less skilled workers, roughly 60% of the increase in wage variability is due to uncertainty. For more skilled workers, only 8% of the increase in wage variability is due to uncertainty. Roughly 26% of the increase in the variance of returns to schooling is due to increased uncertainty. Using conventional measures of income inequality masks the contribution of rising uncertainty to the rise in the inequality of earnings for less educated groups.
ER  -