Life-Cycle Patterns of Earnings Shocks

This paper addresses the estimation of individual income dynamics. It introduces a novel methodology that detects the presence of patterns in the lifecycle and the economic forces in action. I estimate a Bayesian LSTAR(1)... [ view full abstract ]

This paper addresses the estimation of individual income dynamics. It introduces a novel methodology that detects the presence of patterns in the life
cycle and the economic forces in action. I estimate a Bayesian LSTAR(1) model
with a rich level of heterogeneity and find that there is a life-cycle pattern in
earnings shocks: before age 29, workers experience shocks with higher variance
and a positive probability of having a lower persistence than older workers. A
comparison with conventional models shows the importance of modelling correctly the level of heterogeneity in the innovations. The results can be used by
macroeconomists to calibrate income processes.