The Covariance Structure of Earnings in Great Britain: 1991-1999

In this paper I analyse the dynamic structure of earnings in Great Britain for the period 1991-1999 by decomposing the earnings covariance structure into its permanent and transitory components. Using information on monthly earnings of male full-time employees from the first nine waves of the British Household Panel Study I find that earnings inequality increases over the Nineties. However, earnings mobility may have also increased. That is, for this period earnings persistence falls. Surprisingly, I also find that relative earnings persistence declines over the life cycle, which implies lower mobility for younger cohorts. This evidence is at odds with previous literature on earnings dynamics both for Britain and other OECD countries. Unlike recent studies, I also consider the effects of observed characteristics on the covariance structure of log earnings and find that human capital and job related characteristics account for nearly all persistent earnings differences and that the transitory component is highly persistent. * This paper is a revised version of a chapter from my PhD thesis at the Institute for Social and Economic Research, University of Essex. I would like to thank Stephen Jenkins for his many and valuable comments and discussions and to Lorenzo Cappellari for giving me his Stata programmes and for his helpful comments. My thanks also to Frank Cowell, John Ermisch and Richard Dickens. The usual disclaimer applies. Correspondence to: Universitat Autònoma de Barcelona, Dept. Economia Aplicada, Edifici B, 08193 Bellaterra. Spain. E-mail: [email protected]