1 Introduction

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Canada's labour market in the 1980s and 1990s was subject to transformations such as an increasing integration with the U.S. economy and shifting trade flows, the rapidly advancing state of information technology, shifting modes and organization of production such as 'out-sourcing' and non-standard work patterns, fluctuating prices for natural resources and marked changes in the Canadian exchange rates, highly uneven regional growth rates, increasing competition and workers vulnerability, and high inflows of immigrants. On the macroeconomic level, the economy recovered slowly from the severe recession of the early 1990s, as the unemployment rate was persistently high until the late 1990s. These developments might well be expected to have had an impact on the distribution of labour market earnings across workers.

This paper examines the variability of workers' earnings in Canada over the 1982-to-2000 period in a graphical, non-structural approach that uses a large representative longitudinal administrative database. Following a methodology from Gottschalk and Moffitt 1994, we decompose the total variance of workers' earnings over this period into a 'permanent' or long-run component between workers and a 'transitory' or year-to-year earnings instability component over time for given workers. The novel methodological extension of this paper is that this decomposition is applied to a five-year moving window of earnings in order that we can examine—graphically and through regression techniques—how total earnings variation and its two components have changed over these two recent decades in a quite flexible, non-structural fashion. We report results separately for men and for women and also for four separate age groups of workers. The flexible moving feature of the structure of our dataset also permits an examination of how the earnings variance components vary with the macroeconomic indicators, the unemployment rate and the real gross domestic product (GDP) growth rate over this period.

Understanding the patterns of long-run earnings differences across workers and their year-to-year earnings instability are of economic and policy interests. Long-run earnings differentials across workers are related to lifetime-earnings patterns and they are affected by such factors as human capital attainment and skill levels, long-run labour force attachment and work patterns, evolving industry/occupational mix in the economy, and shifting returns to skills and cohort effects that speak to issues involving skills, job matching, access to training and efficient usage of human capital. Year-to-year changes reflecting earnings instability are a result of more transitional factors, such as unemployment and workplace restructuring, contingent and non-standard employment relationships, volatile primary good prices and changing occupational demand patterns, and volatility in firm performance. They focus policy attention more on issues such as social insurance, improvement of the flow and quality of labour market information and macroeconomic policy. Decomposing overall inequality changes into more permanent and short-run sources also allows one to betterinterpret and test alternative explanations for observed outcomes.

Strictly cross-sectional analyses have shown that earnings inequality increased significantly in Canada in the later 1980s and during the 1990s (Beach and Slotsve 1996; Burbidge, Magee and Robb 1997; Frenette, Green and Picot 2004; Heisz, Jackson and Picot 2002; Johnson and Kuhn 2004; Picot 1997; Richardson 1997; Wolfson and Murphy 1998). This development is reflected in Figure 1, which illustrates how total variance of workers' earnings—explained in more formal detail below¹ —did indeed increase over this period; the horizontal axis represents a moving five-year window from the 1982-to-1986 interval to the 1996-to-2000 interval. But looking at a moving-time series shows that this overall increase was not at all monotonic, and there were indeed quite different patterns (outside the 1986-to-1990 to 1991-to-1995 period) occurring for women and for men. There is evidently a major cyclical aspect to the patterns as well. Furthermore, Figures 2 and 3 highlight that the transitory and long-run components—again described in more detail below—are contributing in quite different ways to the total variance increase. Long-run earnings differentials (Figure 3) have largely increased, especially for men, while earnings instability (Figure 2) has largely decreased, most markedly among women in the labour market. One interesting finding is that long-run earnings inequality for men decreased over the growth period of the 1980s, but it then increased over the growth period of the 1990s. The primary objective of this paper is to examine and try to explain these and more detailed age-specific patterns of earnings variation changes for Canada.

In terms of both scope and methodology, the current paper builds on our previous work. Beach, Finnie and Gray (2003) laid out the background for estimation of the variation in earnings and the decomposition process and then showed a structural shift in the variance measure between the 1980s and 1990s. Beach, Finnie and Gray (2005) incorporated a regional dimension, along with a temporal shift (1982 to 1989 compared with 1990 to1997) and used multivariate analysis to identify business-cycle effects on the measures of earnings variance between the two periods and across geographical regions. The present paper extends the latter analysis methodologically by incorporating a moving-average measure of permanent earnings within the Gottschalk-Moffitt decomposition approach. This allows one to calculate a time series of variance components and thus to analyse detailed year-to-year changes in these variance measures, both graphically and by regression techniques. Macroeconomic effects can therefore be estimated directly, rather than be inferred indirectly, from regional differences in macroeconomic performance. The current analysis also extends up to 2000 and brings in the further richness of age and gender differences in the time series patterns.

Section 2 of this paper contains a brief survey of the relevant literature. Section 3 then sets out the analytical framework and Section 4 outlines the dataset employed as well as the main characteristics of the estimation samples. Section 5 presents sets of graphical results on time-series patterns of long-run earnings inequality and year-to-year earnings instability. A regression analysis of underlying trends and macroeconomic effects occurs in Section 6. The major findings are then reviewed and highlighted in the concluding section.

 

¹ All variance measures are calculated from life-cycle adjusted log earnings (in thousands of 1997 dollars).