The covariance structure of male wages in the United Kingdom

This paper uses the New Earnings Survey (NES) panel dataset from 1975 to 2001 to analyse the variance-covariance structure of individual gross hourly wage in the United Kingdom. Special emphasis is given to the evidence for the validity of the Restricted Income Pro le (RIP) hypothesis versus the Heterogeneous Income Profile (HIP) hypothesis. These two processes are typically used to model the individualearnings process. Applying minimum distance estimation to the error components model, I find evidence in favor of the RIP hypothesis. In the UK individuals are subject to large and persistent income shocks while facing similar life-cycle earnings profiles. This finding is in contrast with the previous studies using the US data, which conclude that the HIP hypothesis holds and individuals are subject to modestpersistent income shocks while facing individual-specific earnings profiles. Under the RIP process, this paper also discusses the persistence of the transitory component and its accumulated effect on cross-sectional variance. Furthermore, the analysis of the age-variance profile implies that the cross-sectional variance increases with age in a concave fashion, and this finding is in line with the previous empirical literature using the UK data.

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