7 Review and conclusions

View the most recent version.

This study has examined the variability of workers' earnings in Canada over the 1982-to-2000 period, using a largely non-structural approach with the Longitudinal Administrative Database. The total longitudinal variance in earnings across workers and over time for sample workers is decomposed, using a methodology employed by Gottschalk and Moffitt 1994, into a permanent or long-run inequality component between workers and a year-to-year earnings instability component over time. A methodological innovation of the paper is that this decomposition is applied to a five- year moving window of earnings, so that the analysis can examine how total earnings variance and its two components have changed over the 1980s and 1990s in a quite flexible, non-structural fashion at an annual frequency. This approach also allows for linkage to macroeconomic indicators. The study reports results separately for men and women and for four separate age groups of workers. The empirical analysis relies on both graphical and regression techniques.

Several major results have been found. First, the general rise in total earnings variance between the 1980s and 1990s was not at all inter-temporally monotonic and it reflects quite different patterns of changes between its two components. Long-run earnings inequality has generally increased over the period, while the year-to-year earnings instability has pretty steadily decreased, except during the early 1990s recession. Changes in total earnings variability have been driven primarily by changes in long-run earnings inequality. In contrast to Moffitt and Gottschalk's (2002) finding of a secular rise in permanent earnings inequality in the United States, we find that for both men and women— as shown in Figure 3—there is a significant run up in the permanent component from around 1986 to 1995, following a slight decrease in the early to mid-1980s. Our results are more reflective of strong cyclical effects than of a dominating upward trend. Also, unlike Moffitt and Gottschalk (2002), we do not find dramatic increases in earnings instability in the 1980s—as shown in Figure 2—but only from around 1988 to 1991, and thereafter there are largely decreases. Again our results are suggestive of there being stronger cyclical effects on earnings instability in Canada than in the United States. Thus, like Haider (2001), we find counter-cyclical patterns in both long-run inequality and earnings instability components, but our findings suggest rather stronger cyclical effects in Canada than for the United States, and that these cyclical effects operate more strongly through permanent inequality earnings differences in Canada than in the United States.

Second, outside the early 1990s recession period, when almost all variance measures rose, the patterns of change in the two variance components were quite different between men and women. Since the early 1990s, long-run earnings inequality continued to rise for men, but markedly decreased for women. Since the later 1980s, short-run earnings instability fell quite steadily for women, but showed a more cyclical pattern for men. As a result, underlying trends in earnings instability reinforced the rising trends in long-run earnings inequality for men, but weakened or countered the latter effect for women. Unemployment rate effects in both variance components show up quite strongly for men but less so for women. For example, higher unemployment increases earnings instability for men, but it shows much weaker and mixed effects on earnings instability for women. Gross domestic product (GDP) growth rate effects on long-run earnings inequality, however, show up more strongly for women than for men.

Third, the patterns across ages of the two variance components are almost opposite. Long-run earnings inequality generally rises with age, at least for younger workers and beyond, so that it is markedly highest among the older-age workers; while earnings instability generally declines with age, at least until workers reach prime age, so that earnings instability is markedly highest among entry-age workers. The pattern for total earnings variance basically reflects that of long-run earnings inequality. The shifts over time in these age profiles have essentially accentuated these major patterns and are stronger for long-run earnings inequality, particularly so for men.

Fourth, both unemployment rates and GDP growth rates, as macroeconomic indicators, have statistically significant net regression effects on all the earnings variance measures. Unemployment rate effects are positive on almost all variance measures, which are consistent with conventional expectations that tighter labour markets reduce earnings variances, while higher unemployment is associated with widened long-run earnings differentials and greater short-run earnings instability. The effect is stronger for men than it is for women, and it operates more strongly through long-run inequality than through short-run instability of earnings for Canada. The GDP growth rate effect would be expected—according to conventional economic arguments—to be negative on the different variance measures, as greater economic growth reduces earnings inequality and instability. Such estimated effects, indeed, hold for women and for earnings instability among men. Growth rate effects on men's long-run earnings inequality, and total earnings variance, however, are found to be positive—more consistent with an alternative 'new economy' set of explanations based on economic restructuring and changing demographics. Overall economic prosperity has evidently not been narrowing men's earnings inequality in the Canadian economy over the last decade, and further inquiryis needed as to why.