Trends in the Transitory Variance of Male Earnings in the U.S., 1970-2004
We estimate the trend in the transitory variance of male earnings in the U.S. using the Michigan Panel Study of Income Dynamics from 1970 to 2004. Using both an error components model as well as simpler but only approximate methods, we find that the transitory variance started to increase in the early 1970s, continued to increase through the mid-1980s, and then remained at this new higher level through the 1990s and beyond. Thus the increase mostly occurred about thirty years ago. Its increase accounts for between 31 and 49 percent of the total rise in cross-sectional variance, depending on the time period.
The authors would like to thank the participants at many seminars and conferences for comments, Joe Tracy and John Abowd for discussant comments, and Tom DeLeire and Gary Solon for helpful conversations. Outstanding research assistance was provided by Yonatan Ben-Shalom, Kai Liu, Shannon Phillips, and Sisi Zhang. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.