An Empirical Analysis of Income Dynamics Among Men in the PSID: 1968–1989

This study uses data from the Panel Survey of Income Dynamics (PSID) to address a number of questions about life cycle earnings mobility.It develops a dynamic reduced form model of earnings and marital status that is nonstationary over the life cycle.The study reaches several firm conclusions about life cycle earnings mobility.Incorporating non-Gaussian shocks makes it possible to account for transitions between low and higher earnings states, a heretofore unresolved problem.The non-Gaussian distribution substantially increases the lifetime return to post-secondary education, and substantially reduces differences in lifetime wages attributable to race.In a given year, the majority of variance in earnings not accounted for by race, education and age is due to transitory shocks, but over a lifetime the majority is due to unobserved individual heterogeneity.Consequently, low earnings at early ages are strong predictors of low earnings later in life, even conditioning on observed individual characteristics.