IDEAS home Printed from https://ideas.repec.org/p/hka/wpaper/2020-075.html
   My bibliography  Save this paper

Earnings Dynamics and Intergenerational Transmission of Skill

Author

Listed:
  • Lance Lochner

    (University of Western Ontario)

  • Youngmin Park

    (Bank of Canada)

Abstract

This paper develops and estimates a two-factor model of intergenerational skill transmission when earnings inequality reflects differences in individual skills and other non-skill shocks. We consider heterogeneity in both initial skills and skill growth rates, allowing variation in skill growth to change over the lifecycle. Using administrative tax data on two linked generations of Canadians covering 37 years, we exploit covariances in log earnings (at different ages) both across and within generations to identify and estimate the intergenerational correlation structure for initial skills and skill growth rates, lifecycle skill growth profiles, and the dynamics of non-skill earnings shocks. We estimate low intergenerational elasticities (IGE's) for earnings in Canada (less than 0.2 even based on 5- and 9-year average earnings); however, skill IGE's are typically 2–3 times larger due to considerable (and persistent) variation in earnings conditional on skills. Both earnings and skill IGE's decline substantially for more recent cohorts and are lower for children born to younger fathers. We estimate significant heterogeneity in both initial skills and skill growth rates, showing that intergenerational transmission of these factors explains up to 40% of children's skill variation. Skills become a more important determinant of earnings over the first part of workers' careers, while intergenerational transmission of skills becomes less important with age. Although "inherited" initial skills (compared to skill growth) are a more important determinant of children's skills throughout their lives, parents' initial skills and skill growth rates are equally important determinants of children's skills, largely because both strongly influence children's initial skills. Finally, we study intergenerational mobility for the 35 largest cities in Canada, determining the extent to which considerable differences in earnings and skill IGE's vary with the extent of local heterogeneity in parental skills vs. earnings instability.

Suggested Citation

  • Lance Lochner & Youngmin Park, 2020. "Earnings Dynamics and Intergenerational Transmission of Skill," Working Papers 2020-075, Human Capital and Economic Opportunity Working Group.
    • Handle: RePEc:hka:wpaper:2020-075
    Note: M
    as

    Download full text from publisher

    File URL: http://humcap.uchicago.edu/RePEc/hka/wpaper/Lochner_Park_2020_earnings-dynamics-intergen-trans-skill.pdf
    File Function: First version, August 27, 2020
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Gallipoli, Giovanni & Low, Hamish & Mitra, Aruni, 2020. "Consumption and Income Inequality across Generations," CEPR Discussion Papers 15166, C.E.P.R. Discussion Papers.
    2. Pedro Carneiro & Karsten T. Hansen & James J. Heckman, 2003. "Estimating Distributions of Treatment Effects with an Application to the Returns to Schooling and Measurement of the Effects of Uncertainty on College," NBER Working Papers 9546, National Bureau of Economic Research, Inc.
    3. Flavio Cunha & James Heckman & Salvador Navarro, 2005. "Separating uncertainty from heterogeneity in life cycle earnings," Oxford Economic Papers, Oxford University Press, vol. 57(2), pages 191-261, April.
    4. Bhashkar Mazumder, 2005. "Fortunate Sons: New Estimates of Intergenerational Mobility in the United States Using Social Security Earnings Data," The Review of Economics and Statistics, MIT Press, vol. 87(2), pages 235-255, May.
    5. Martin Nybom & Jan Stuhler, 2016. "Heterogeneous Income Profiles and Lifecycle Bias in Intergenerational Mobility Estimation," Journal of Human Resources, University of Wisconsin Press, vol. 51(1), pages 239-268.
    6. Marie Connolly & Miles Corak & Catherine Haeck, 2019. "Intergenerational Mobility Between and Within Canada and the United States," Journal of Labor Economics, University of Chicago Press, vol. 37(S2), pages 595-641.
    7. Jacob A. Mincer, 1974. "Introduction to "Schooling, Experience, and Earnings"," NBER Chapters, in: Schooling, Experience, and Earnings, pages 1-4, National Bureau of Economic Research, Inc.
    8. Carneiro, Pedro & Hansen, Karsten T. & Heckman, James J., 2003. "Estimating Distributions of Treatment Effects with an Application to the Returns to Schooling and Measurement of the Effects of Uncertainty on College Choice," IZA Discussion Papers 767, Institute of Labor Economics (IZA).
    9. Lance Lochner & Youngmin Park & Youngki Shin, 2017. "Wage Dynamics and Returns to Unobserved Skill," University of Western Ontario, Centre for Human Capital and Productivity (CHCP) Working Papers 201726, University of Western Ontario, Centre for Human Capital and Productivity (CHCP).
    10. Mehmet Soytas & Limor Golan & George-Levi Gayle, 2014. "What Accounts for the Racial Gap in Time Allocation and Intergenerational Transmission of Human Capital?," 2014 Meeting Papers 83, Society for Economic Dynamics.
    11. Elizabeth M. Caucutt & Lance Lochner, 2020. "Early and Late Human Capital Investments, Borrowing Constraints, and the Family," Journal of Political Economy, University of Chicago Press, vol. 128(3), pages 1065-1147.
    12. Miles Corak & Andrew Heisz, 1999. "The Intergenerational Earnings and Income Mobility of Canadian Men: Evidence from Longitudinal Income Tax Data," Journal of Human Resources, University of Wisconsin Press, vol. 34(3), pages 504-533.
    13. Lillard, Lee A & Weiss, Yoram, 1979. "Components of Variation in Panel Earnings Data: American Scientists, 1960-70," Econometrica, Econometric Society, vol. 47(2), pages 437-454, March.
    14. Pedro Carneiro & Karsten T. Hansen & James J. Heckman, 2003. "2001 Lawrence R. Klein Lecture Estimating Distributions of Treatment Effects with an Application to the Returns to Schooling and Measurement of the Effects of Uncertainty on College Choice," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(2), pages 361-422, May.
    15. Raj Chetty & Nathaniel Hendren & Patrick Kline & Emmanuel Saez & Nicholas Turner, 2014. "Is the United States Still a Land of Opportunity? Recent Trends in Intergenerational Mobility," American Economic Review, American Economic Association, vol. 104(5), pages 141-147, May.
    16. Heckman, James J. & Lochner, Lance J. & Todd, Petra E., 2006. "Earnings Functions, Rates of Return and Treatment Effects: The Mincer Equation and Beyond," Handbook of the Economics of Education, in: Erik Hanushek & F. Welch (ed.), Handbook of the Economics of Education, edition 1, volume 1, chapter 7, pages 307-458, Elsevier.
    17. MaCurdy, Thomas E., 1982. "The use of time series processes to model the error structure of earnings in a longitudinal data analysis," Journal of Econometrics, Elsevier, vol. 18(1), pages 83-114, January.
    18. James J. Heckman & Jora Stixrud & Sergio Urzua, 2006. "The Effects of Cognitive and Noncognitive Abilities on Labor Market Outcomes and Social Behavior," Journal of Labor Economics, University of Chicago Press, vol. 24(3), pages 411-482, July.
    19. Haider, Steven J, 2001. "Earnings Instability and Earnings Inequality of Males in the United States: 1967-1991," Journal of Labor Economics, University of Chicago Press, vol. 19(4), pages 799-836, October.
    20. Chen, Wen-Hao & Ostrovsky, Yuri & Piraino, Patrizio, 2017. "Lifecycle variation, errors-in-variables bias and nonlinearities in intergenerational income transmission: new evidence from Canada," Labour Economics, Elsevier, vol. 44(C), pages 1-12.
    21. Jacob A. Mincer, 1974. "Schooling, Experience, and Earnings," NBER Books, National Bureau of Economic Research, Inc, number minc74-1.
    22. Fatih Guvenen, 2007. "Learning Your Earning: Are Labor Income Shocks Really Very Persistent?," American Economic Review, American Economic Association, vol. 97(3), pages 687-712, June.
    23. James Heckman & Lance Lochner & Christopher Taber, 1998. "Explaining Rising Wage Inequality: Explanations With A Dynamic General Equilibrium Model of Labor Earnings With Heterogeneous Agents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(1), pages 1-58, January.
    24. Lance Lochner & Youngmin Park & Youngki Shin, 2017. "Wage Dynamics and Returns to Unobserved Skill," University of Western Ontario, Centre for Human Capital and Productivity (CHCP) Working Papers 201726, University of Western Ontario, Centre for Human Capital and Productivity (CHCP).
    25. Shaw, Kathryn L, 1989. "Life-Cycle Labor Supply with Human Capital Accumulation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(2), pages 431-456, May.
    26. Becker, Gary S & Tomes, Nigel, 1979. "An Equilibrium Theory of the Distribution of Income and Intergenerational Mobility," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1153-1189, December.
    27. Jacob A. Mincer, 1974. "Schooling and Earnings," NBER Chapters, in: Schooling, Experience, and Earnings, pages 41-63, National Bureau of Economic Research, Inc.
    28. Dmytro Hryshko, 2012. "Labor income profiles are not heterogeneous: Evidence from income growth rates," Quantitative Economics, Econometric Society, vol. 3(2), pages 177-209, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Elin Halvorsen & Serdar Ozkan & Sergio Salgado, 2022. "Earnings dynamics and its intergenerational transmission: Evidence from Norway," Quantitative Economics, Econometric Society, vol. 13(4), pages 1707-1746, November.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Magnac, Thierry & Pistolesi, Nicolas & Roux, Sébastien, 2013. "Post schooling human capital investments and the life cycle variance of earnings," TSE Working Papers 13-380, Toulouse School of Economics (TSE).
    2. Flávio Cunha & James Heckman, 2016. "Decomposing Trends in Inequality in Earnings into Forecastable and Uncertain Components," Journal of Labor Economics, University of Chicago Press, vol. 34(S2), pages 31-65.
    3. Tony Smith & M. Fatih Guvenen, 2007. "Inferring Labor Income Risk from Economic Choices: An Indirect Inference Approach," 2007 Meeting Papers 1024, Society for Economic Dynamics.
    4. Magnac, Thierry & Roux, Sébastien, 2021. "Heterogeneity and wage inequalities over the life cycle," European Economic Review, Elsevier, vol. 134(C).
    5. Heckman, James J. & Navarro, Salvador, 2007. "Dynamic discrete choice and dynamic treatment effects," Journal of Econometrics, Elsevier, vol. 136(2), pages 341-396, February.
    6. Sánchez-Romero, Miguel & d׳Albis, Hippolyte & Prskawetz, Alexia, 2016. "Education, lifetime labor supply, and longevity improvements," Journal of Economic Dynamics and Control, Elsevier, vol. 73(C), pages 118-141.
    7. Chaitali Sinha, 2014. "Human Capital and Public Policy," South Asian Journal of Macroeconomics and Public Finance, , vol. 3(1), pages 79-125, June.
    8. Heckman, James J. & Urzúa, Sergio, 2010. "Comparing IV with structural models: What simple IV can and cannot identify," Journal of Econometrics, Elsevier, vol. 156(1), pages 27-37, May.
    9. Seik Kim, 2010. "Uncertainty in Human Capital Investment and Earnings Dynamics," Journal of Human Capital, University of Chicago Press, vol. 4(1), pages 62-83.
    10. Yang, Guanyi, 2018. "Endogenous Skills and Labor Income Inequality," MPRA Paper 89638, University Library of Munich, Germany.
    11. Mark Huggett & Gustavo Ventura & Amir Yaron, 2011. "Sources of Lifetime Inequality," American Economic Review, American Economic Association, vol. 101(7), pages 2923-2954, December.
    12. Mohitosh Kejriwal & Xiaoxiao Li & Evan Totty, 2020. "Multidimensional skills and the returns to schooling: Evidence from an interactive fixed‐effects approach and a linked survey‐administrative data set," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 35(5), pages 548-566, August.
    13. Cunha, Flavio & Heckman, James J., 2007. "Identifying and Estimating the Distributions of Ex Post and Ex Ante Returns to Schooling," Labour Economics, Elsevier, vol. 14(6), pages 870-893, December.
    14. Paul Bingley & Lorenzo Cappellari, 2019. "Correlation of Brothers' Earnings and Intergenerational Transmission," The Review of Economics and Statistics, MIT Press, vol. 101(2), pages 370-383, May.
    15. Martin Nybom & Jan Stuhler, 2016. "Heterogeneous Income Profiles and Lifecycle Bias in Intergenerational Mobility Estimation," Journal of Human Resources, University of Wisconsin Press, vol. 51(1), pages 239-268.
    16. Mohitosh Kejriwal & Xiaoxiao Li & Evan Totty, 2019. "Multidemsional Skills and Returns to Schooling: Evidence from an Interactive Fixed Effects Aproach and a Linked Survey-Administrative Dataset," Purdue University Economics Working Papers 1316, Purdue University, Department of Economics.
    17. Pablo Lavado & Nelson Oviedo & Hernán Ruffo, 2016. "Destruction of Cognitive and Noncognitive Skills in Adulthood," Working Papers 16-07, Centro de Investigación, Universidad del Pacífico.
    18. Belzil, Christian, 2007. "The return to schooling in structural dynamic models: a survey," European Economic Review, Elsevier, vol. 51(5), pages 1059-1105, July.
    19. Christiansen, Charlotte & Joensen, Juanna Schroter & Nielsen, Helena Skyt, 2007. "The risk-return trade-off in human capital investment," Labour Economics, Elsevier, vol. 14(6), pages 971-986, December.
    20. Manudeep Bhuller & Magne Mogstad & Kjell G. Salvanes, 2017. "Life-Cycle Earnings, Education Premiums, and Internal Rates of Return," Journal of Labor Economics, University of Chicago Press, vol. 35(4), pages 993-1030.

    More about this item

    Keywords

    skill transmission; two-factor model; intergenerational elasticities; IGE; Canada;
    All these keywords.

    JEL classification:

    • J62 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Job, Occupational and Intergenerational Mobility; Promotion
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hka:wpaper:2020-075. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Jennifer Pachon (email available below). General contact details of provider: https://edirc.repec.org/data/mfichus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.