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The Impact of Macroeconomic Conditions on the Instability and Long-Run Inequality of Workers' Earnings in Canada

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  • Gray, David
  • Finnie, Ross
  • Beach, Charles M.

Abstract

This paper examines the variability of workers' earnings in Canada over the period 1982-1997 and how earnings variability has varied in terms of the unemployment rate and real gross domestic product (GDP) growth over this period. Using a large panel of tax file data, we decompose total variation in earnings across workers and time into a long-run inequality component between workers and an average earnings instability component over time for workers. The analysis is done for men and women and for both long-run participants and a broad coverage of workers. We find an increase in earnings variability between 1982-1989 and 1990-1997 that is largely confined to men and largely driven by widening long-run earnings inequality. Second, the pattern of unemployment rate and GDP growth rate effects on these variance components is not consistent with conventional explanations of cyclical effects on earnings inequality and is suggestive of an alternative paradigm of how economic growth over this period widens long-run earnings inequality. Third, when the unemployment rate and GDP growth rate effects are considered jointly, macroeconomic improvement is found to reduce the overall variability of earnings as the reduction in earnings instability outweighs the general widening of long-run earnings inequality.

Suggested Citation

  • Gray, David & Finnie, Ross & Beach, Charles M., 2006. "The Impact of Macroeconomic Conditions on the Instability and Long-Run Inequality of Workers' Earnings in Canada," Analytical Studies Branch Research Paper Series 2006268e, Statistics Canada, Analytical Studies Branch.
    • Handle: RePEc:stc:stcp3e:2006268e
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    File URL: https://www150.statcan.gc.ca/n1/en/catalogue/11F0019M2006268
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    References listed on IDEAS

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    1. Ann Bartel & Saul Lach & Nachum Sicherman, 2005. "Outsourcing and Technological Change," NBER Working Papers 11158, National Bureau of Economic Research, Inc.
    2. Charles M. Beach & Ross Finnie & David Gray, 2003. "Earnings Variability and Earnings Instability of Women and Men in Canada: How Do the 1990s Compare to the 1980s?," Canadian Public Policy, University of Toronto Press, vol. 29(s1), pages 41-64, January.
    3. R. Moffitt & P. Gottschalk, "undated". "Trends in the covariance structure of earnings in the United States: 1969-1987," Institute for Research on Poverty Discussion Papers 1001-93, University of Wisconsin Institute for Research on Poverty.
    4. Finnie, Ross & Beach, Charles M., 2004. "A Longitudinal Analysis of Earnings Change in Canada," Analytical Studies Branch Research Paper Series 2004227e, Statistics Canada, Analytical Studies Branch.
    5. Abowd, John M & Card, David, 1989. "On the Covariance Structure of Earnings and Hours Changes," Econometrica, Econometric Society, vol. 57(2), pages 411-445, March.
    6. 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.
    7. Baker, Michael, 1997. "Growth-Rate Heterogeneity and the Covariance Structure of Life-Cycle Earnings," Journal of Labor Economics, University of Chicago Press, vol. 15(2), pages 338-375, April.
    8. Charles M. Beach & Ross Finnie, 2004. "A longitudinal analysis of earnings change in Canada," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 37(1), pages 219-240, February.
    9. Charles Beach & Ross Finnie, 2004. "A longitudinal analysis of earnings change in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 37(1), pages 219-240, February.
    10. Robert A. Moffitt & Peter Gottschalk, 2002. "Trends in the Transitory Variance of Earnings in the United States," Economic Journal, Royal Economic Society, vol. 112(478), pages 68-73, March.
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    Cited by:

    1. Charles M. Beach & David Gray & Ross Finnie, 2006. "Long-run Inequality And Annual Instability Of Men's And Women's Earnings In Canada," Working Paper 1116, Economics Department, Queen's University.

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    Keywords

    Income; pensions; spending and wealth; Labour; Low income and inequality; Wages; salaries and other earnings; Work transitions and life stages;
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