Permanent and Transitory Wage Inequality of British Men, 1975-2001: Year, Age and Cohort Effects

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IZA Seminar

Place: Schaumburg-Lippe-Str. 9, 53113 Bonn

Date: 11.11.2003, 12:15 - 13:30


Presentation by 

Adriaan Kalwij (Utrecht School of Economics)


We examine the variance-covariance structure of log-wages over time and over the lifecycle of British men from 1975 to 2001, hereby controlling for cohort effects. Wage inequality has risen sharply during the 1980ís and early 1990ís and remained fairly constant in the second half of the 1990ís. We show that this increase is caused mainly by a strong increase in transitory wage inequality and only to a lesser extent to an increase in permanent wage inequality. The transitory component of log-wages is, however, highly persistent over time: serial correlation decreases from 0.88 over a one-year period to 0.65 over a ten-year period. The constant wage inequality in the second half of the 1990ís is attributed to a slight decrease in permanent wages inequality, a stabilization of the variance of the transitory wage shock, and the strong decrease in transitory wage inequality for the cohorts entering employment since the end of the 1980ís. Ignoring age effects in transitory wage inequality and cohort effects, as is commonly done, leads to severely distorted inferences concerning the changes in permanent wage inequality.

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